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                
                     
             
 
                                           
from state socialism relies not only on evolutionary bottom-up
processes but also on sustained intervention by the state to build a new in-
stitutional framework. e state must simultaneously dismantle the institu-
tions of central planning and put in place the requisite rules of competition
and cooperation of a capitalist economy. e shi of control rights is oen
retarded, however, by mutually reinforcing interests that perpetuate a close
relationship between the state and the rm. On the one hand, state actors are
rarely willing to institute a new economic system that completely deprives
them of direct control rights at the rm level. On the other hand, managers
oen prefer the continuation of direct state-rm linkages to gain access to
resources in a highly insecure and rapidly changing business environment.
As a result, “there is still a much dierent atmosphere of interaction between
government and individual economic agents in ex-socialist countries than in
countries with a long tradition of free markets” (Murrell :).
We call this type of institutional order politicized capitalism, where state
actors set the regulatory framework and remain directly involved in guiding
transactions at the rm level. In transitions from state socialism, politicized
capitalism is a hybrid order comprising recombinant institutional elements,
preexisting and emergent organizational forms, and networks oriented to es-
tablishing a market economy (Stark ; Nee ). It is a mixed economy in
which market liberalization and ownership reform are unnished, preserving
 
partial control rights by the state as both a redistributive allocator and an
owner of productive assets. Although the new rules of a market economy im-
pose formal limits on state interventions in the rm, the dening feature of
politicized capitalism is the overlap of political and economic markets and the
absence of clearly dened state-rm boundaries. e central dilemma faced
by reformers is to promote market-driven economic growth within the con-
straints imposed by competing demands of political and economic actors.
Politicized capitalism emerged in China in the s in the course of mar-
ket transition (Zhou ). is chapter examines the structural tensions be-
tween state intervention and marketization in the emergence of China’s new
capitalist economy. Apart from occasional rural markets, the market as a co-
ordinating mechanism of production and distribution was virtually nonex-
istent before the start of economic reform in . Under Mao, markets and
private ownership of productive assets were eliminated and replaced by a vast,
multitiered national system of nonmarket bureaucratic allocation. e char-
acteristic feature of the Maoist-era institutional order was a pervasive reliance
on political controls in a redistributive economy where the communist party
and government managed all dimensions of production and distribution
(Schurmann ; Whyte and Parish ; Walder ). Market transition is
a dynamic transformative process characterized by a diminishing role of cen-
tral planning and increasing signicance of market institutions in economic
life. Figure - provides a conceptual map, with ideal-type institutional or-
ders arrayed by the extent to which market versus planning and private versus
state ownership of productive assets enable, motivate, and guide economic ac-
tivity. Politicized capitalism is a hybrid institutional order in which recombi-
nant elements of central planning and state control combine and interact with
emergent markets and private ownership forms. It comprises institutional ar-
rangements patched together in ad hoc improvisations to address the needs
and demands arising from rapid market-oriented economic growth.
e question we explore here is whether politicized capitalism embodies
a Nash-like equilibrium, the stable institutional order at the culmination of
departures from central planning. In this case, the dening feature of politi-
cized capitalism persists in the close overlap of political and economic mar-
kets wherein the state is actively involved at the rm level. Alternatively, if
politicized capitalism is itself an embodiment of the organizational dynamics
of market transition, constructed from recombinant institutional elements
to facilitate the rise of a capitalist economy, as Greif () has detailed for
 
Europe, we predict that political interference in economic life declines in in-
dustrial sectors and regions to the extent that an emergent market economy
replaces the centrally planned economy (Nee , ). If this alternative
scenario holds, it would be conrmed by evidence of decline in the politi-
cized nature of economic decisions in state-rm relations as the role of the
state shis to greater emphasis on building market institutions, i.e., property
rights, legal system, market structures.
China’s politicized capitalism bears a strong family resemblance to other
developmental states in East Asia in its reliance on state intervention to pro-
mote transformative economic growth. e goal of the state is to wield state
power at the national and local levels to enable, motivate, and guide economic
development in order to “catch up” with the advanced industrial economies.
In China even more than in the other East Asian developmental states, growth
and economic modernization are the basis of state power, providing legiti-
macy for the continuation of the Chinese Communist Party (CCP) leadership.
A strategy of transition has evolved that addresses the interest of reformers in
safeguarding the power and privileges of the political elite even while imple-
menting wide-ranging economic reforms that both reduce the scope of state
managerial controls over production and distribution and expand the role of
the market as a mechanism to motivate and guide economic growth.
Politicized capitalism as a hybrid order permeates the transition economy,
but its role in guiding economic action is a variable feature of economic life
subject to empirical analysis. e remainder of the chapter is organized as fol-
lows: In the following sections we discuss core features of China’s politicized
Figu re 4 -1 Politicized Capitalism as a Transformative Economic Order
Market economy
Market socialism
Capitalist planned economy Centrally planned economy
 
capitalism as a distinct type of developmental state and then give an overview
of China’s growth promoting macro-policies. We then explore state interven-
tionism at the rm level as a core feature of China’s hybrid capitalist system.
We focus on discrete empirical studies exploring two types of state interven-
tions: () state assistance in the rm’s external transactions, such as govern-
ment assistance in securing loans and () state interventionism in corporate
governance inside the rm. In conclusion, we oer an outlook on the expected
development of China’s institutional order of politicized capitalism.
Overall, we report evidence on the persistence of state involvement at the
rm level. Our evidence reveals a rather complex situation: On the one hand,
direct state involvement in decision making at the rm level has a negative
eect on performance; on the other hand, rms will not openly reject state
involvement because they still rely on state actors to ease resource constraints
of China’s regulated markets. Because market transition creates conditions of
decreasing resource dependence on the state, politicized capitalism is inher-
ently in disequilibrium (Nee ; Nee and Lian ). Where private rms
compete in open markets, entrepreneurs prefer to be free of the communist
party. A tipping point is reached when a critical mass of entrepreneurs no lon-
ger depends on state-controlled resources, and growing reliance on tax rev-
enues contributed by private enterprises reinforces incentives for government
to make resource allocation decisions based on assessment of their eects on
local economic performance and on their prospects for career mobility.
China’s economic miracle has riveted attention on the positive role of the state
in promoting transformative economic development. As Stiglitz observes,
“e contrast between Russia’s transition, as engineered by the international
economic institutions, and that of China, designed by itself, could not be
greater: While in  China’s gross domestic product (GDP) was  per-
cent that of Russia, by the end of the decade the numbers had been reversed.
While Russia saw an unprecedented increase in poverty China saw an unprec-
edented decrease” (:). Per capita GDP grew from  to  (constant
prices ) between  and . e market capitalization of rms listed
on China’s stock exchanges increased from  percent of the GDP in  to
 percent by . Exports increased from  billion in  to  billion
per annum in  (constant prices ). Annual net foreign direct invest-
ments grew from  million in  to . billion in  (World Bank
 
). China thus becomes the latest entry in the pantheon of successful de-
velopmental states, along with South Korea, Taiwan, and Japan (Stiglitz ).
In its core features, China’s current economic system of politicized capi-
talism resembles that in other East Asian societies in the early stages of eco-
nomic takeo. Direct state intervention at the rm level is widespread, and
the state’s guiding hand in promoting national growth remains visible. Two
mutually reinforcing institutional changes frame the interactions between the
local state bureaucracy and rm-level economic actors: a) modernization of
the party and government bureaucracy and b) scal decentralization.
Strengthening Bureaucratic Capacity after Mao
Modernization of the state bureaucracy has been the government’s priority
throughout the reform period. Mao’s decade-long Cultural Revolution crip-
pled China’s state apparatus. It politicized the structure of bureaucratic career
mobility, severely undermining rules and norms of merit-based recruitment
and promotion. e predominance of “red” cadres recruited and promoted on
the basis of their political activism reduced the state’s capability to perform
routine administrative tasks. Demoralization and the accompanying break-
down of rational-legal norms and procedures resulted in reliance on personal
connections (guanxi) in the functioning of public administration. Given
widespread local cadre opposition at the outset of economic reform, reform
leaders soon realized that restoring the ecacy of the state bureaucracy was
essential to success in their ambitious reforms (Nee ).
Administrative reforms in the s introduced strict retirement ages for
government ocials and a one-time buyout strategy to retire old veterans as a
means to push out Maoist bureaucrats who were impeding progress in market-
oriented economic reforms. Early retirement was aimed at reducing bureau-
cratic inertia and commitment to the old planning mentality of state social-
ism (Lipton and Sachs ; Murrell ). Reformers also sought to build a
modernized bureaucracy by implementing merit-based entrance exams and
promotion schemes to reinforce incentives to improve local economic devel-
opment (Li ; Li and Lian ). College education and technical qualica-
tions became general entrance criteria. Many elite bureaucrats are recruited
with engineering and public administration degrees, reecting the emphasis
on technical training and expertise.
As a result of these administrative reforms, government regulations and
procedural guidelines have become more and more precise and transparent
(Yao ). is has increased the predictability of bureaucratic decisions
 
and reduced uncertainty with respect to government policy and regulatory
practices. e passage in  of a comprehensive legal code governing civil
service culminated this two-decade-long concerted eort by reform leaders
to modernize China’s state bureaucracy. e new civil service law sets forth
strict, rule-governed performance guidelines with respect to appropriate con-
duct. Public announcement of openings, reliance on scores in civil service
examinations to recruit candidates, annual performance reviews, competitive
examinations in routine promotions, and monitoring by the personnel de-
partment have been institutionalized at all levels of the national bureaucracy.
Notwithstanding national reform measures, the quality of the state bu-
reaucracy varies considerably across regions and localities in China. Progress
in building a modern bureaucracy has been uneven and inconsistent. In poor,
rural hinterland regions, corruption is an incorrigible feature of local public
administration. Predatory behavior on the part of government ocials is re-
ected in the routine use of local state administration to extract surplus from
peasants through local levies and taxes, hosting of banquets at the expense of
entrepreneurs, requisition of farmland for use by developers without adequate
compensation to the farmers, and ocial tolerance of environmental degra-
dation. Moreover, local bureaucrats routinely intervene as predatory agents
under the cover of promoting economic development. Widespread public per-
ception of abuse of power and corruption has contributed to a sharp increase
in the frequency and contentiousness of local protests and rebellions. e an-
nual number of mass incidents is on the rise, with around , registered
protests and petitions in  (Li ). Despite the national guidelines up-
holding merit-based recruitment and promotions of government and party
bureaucrats, the poor hinterland regions lag far behind the coastal provinces
in the formal training and technical competence of civil servants.
Max Weber ([] ) observed that the rise of market capitalism and
the development of modern bureaucracy are closely coupled institutional pro-
cesses. As in the rise of capitalism in the West, modernization of the civil
service in China has made the most rapid progress in the prosperous private
enterprise economy of the coastal regions. In the course of two decades of
reform, the Yangzi Delta region, an epicenter of Chinese capitalism, has at-
tained a level of bureaucratic eciency comparable with Western industrial-
ized countries. According to the World Competitiveness Yearbook, covering
 countries and economic regions worldwide, Zhejiang province was ranked
 in terms of bureaucratic eciency1 (score .) in , ahead of the United
 
States (.) and Australia (.). Although China’s overall score is much
lower, ranking , it ranks higher than some European industrialized coun-
tries including Germany, the United Kingdom, Belgium, and Italy. Corrup-
tion and bribe taking are also far less pronounced in Zhejiang province (rank
; scoring higher than the Czech Republic and Hungary, Europe’s success-
ful transition economies) than in China as a whole (rank ). Recruitment of
elite bureaucrats relies on open competitive national searches. Recruiters are
even sent to North America to interview Chinese students with postgraduate
degrees from U.S. and Canadian universities for specic key positions. Short-
term training workshops in the West are increasingly popular and involve the
major elite universities.
ough traditional China was the rst to institute national civil service
examinations in recruiting scholar-ocials for the imperial bureaucracy,
the spirit of the imperial bureaucracy was shaped by generalists, the elite
literati committed to Confucian moral and ethical teaching. It was not until
the contemporary era that rational-legal norms and approach to public ad-
ministration have gained legitimacy as the dening spirit for the government
bureaucracy. Rather than generalists, as in the “red” cadres of the Cultural
Revolution era, today’s elite bureaucrats are recruited for their technical ex-
pertise and promoted for their performance as technocrats. Competition in
internal bureaucratic promotion is intense and the standards of annual per-
formance reviews are high but transparent, allowing fair evaluations and pre-
dictable career paths. rough strict implementation of national rules and
standards, the provincial government of Zhejiang province has successfully
reestablished the high social status government ocials traditionally held in
China. With its emphasis on merit-based recruitment and promotion, Hang-
zhou municipal government has built a modern bureaucracy that uses state-
of-the-art knowledge in public administration and related elds, typically
favoring indirect means of governance—tax policy, regulatory action—over
direct interventions in the rm.
e building blocks of Zhejiang’s bureaucratic modernization are promul-
gated in China’s civil service laws and preceding regulations. e particular
success may lie in a specic esprit de corps that Zhejiang’s government suc-
ceeded in establishing. Notwithstanding, Zhejiang’s success in building an
eective state bureaucracy should not diverge much from other areas of China
where private enterprise and markets have gained a critical mass. Overall, the
state bureaucracy is undergoing a process of dynamic transformation from
 
a Maoist-era politicized state apparatus to a technocratic bureaucracy that
emphasizes higher education and technical expertise in the recruitment and
promotion of bureaucrats. Secure government employment coupled with high
social status and attractive benets serve as incentive to avoid malfeasance.
As this transformation progresses, politicized capitalism is in disequilibrium
as the rise of a private-enterprise economy and competitive markets rapidly
diminishes the relative industrial output of state-owned enterprises (SOEs)
and drives the Chinese state inexorably toward less direct interventions at the
rm-level, and indirect instruments such as taxation and credit policies.
Fiscal Federalism
e theory of state and local nance has long stressed the disciplining eect
of scal decentralization on government activities and the provision of pub-
lic goods. Qian and Roland () oer a model to analyze the relationships
among the organization of the state, economic policies, and the tightness of
scal budget constraints. ey identify two main mechanisms that may con-
strain predatory political interference in the economy. First, under the as-
sumption of factor mobility, a federalist system introduces competition among
local governments, which increases opportunity costs of bailouts and any ac-
tivities leading to inferior enterprise performance (Weingast ). If local
government jurisdictions fail to provide a hospitable business environment,
they face poor chances of attracting resources needed to enhance economic
prosperity. Competition in a federalist system eventually limits discretionary
authority, predatory behavior, and rent-seeking. Second, in federal systems,
scal decentralization may harden budget constraints of jurisdictions and
provide incentives for eciency-oriented local activities. Local governments
compete to build a business environment favorable to private capital.
Indeed, China’s policy of scal decentralization has constituted a key in-
stitutional innovation aimed at strengthening economic incentives of munici-
pal and provincial governments to support market-oriented economic reform.
According to the scal revenue-sharing system, lower-level governments have
the obligation to submit a xed proportion of scal revenues to their superior
government unit, while retaining the residual for their own budget. Given that
tax revenues are positively correlated with rm performance, local bureau-
crats have an incentive to do what they can to assure that local rms prosper
(Montinola et al. ; Li ). Fiscal federalism has thus developed into a
major driving force of economic reforms in China. With increasing nancial
 
independence of local governments, revenue-generating reforms have gained
in importance, whereas the incentive for local governments to maintain ele-
ments of the old socialist command economy has declined.
Increasing nancial responsibilities and hardening budget constraints im-
posed strong pressure on government to privatize the local economies, given
low protability, weak tax revenues, and increasing state subsidies needed to
maintain loss-making state industries, and the superior economic perfor-
mance of private rms over state-owned rms. Local governments developed
a strong interest in divesting loss-making state-owned rms. Figure - de-
picts the close negative bivariate relation between state-owned production
and local revenues and more specically between state-owned industrial pro-
duction and corporate tax income at the provincial level between  and
. It shows that provinces that have declining industrial production from
state-owned enterprises relative to nonstate rms also have higher corporate
tax revenues.
Provincial and municipal governments responded to increasing economic
pressure by accelerating privatization and divestiture of state-owned assets.
Following China’s ocial policy, “zhua da, fangxiao” (grasp the big ones and
let the small ones free), the s saw an unprecedented increase in the pace
of privatization of these enterprises. Small- and medium-size rms were sold
in the form of manager or employee buyouts or auctioned o, whereas big
state corporations of the so-called sensible key sectors were partially priva-
tized and corporatized, with many of them being listed at one of China’s
two stock exchanges. As a consequence, the number of state-owned enter-
prises was reduced by more than  percent from , to , and total
national employment in them was reduced from  million to  million
between  and , while their total production value was stabilized at
around  percent of gross industrial output. Within the nonstate economy,
private sector development emerged as the most dynamic growth engine
of China’s economy. By the end of , registered employment in the pri-
vate sector already reached  million with an annual production growth of
 percent, out-competing all other ownership forms (China State Statistical
Yearbook ).
Figure - illustrates the close parallel development of waning state-owned
industrial production and increasing market liberalization based on pooled
provincial-level data covering the period between  and . It conrms
that as the market economy expands, the gross industrial output contributed
 
Figu re 4 - 2 State-Owned Production and Provincial Revenues,
source: National Bureau of Statistics of China.
Corporate Tax (billion RMB) Local revenue (billion RMB)
State owned production / Total Gross Industrial Output
State owned production / Total Gross Industrial Output
.2 .4 .6 .8 1
.2 .4 .6 .8 1
 
by state-owned enterprises declines. In other words, as predicted, in market
transitions the greater the size of the market economy, the less state-owned
productive assets can compete with private-ownership forms in the produc-
tion of industrial output (Nee ; Naughton ). We infer from Figure -
that the state-owned sector is strongest in regions of the transition economy
where competitive markets are still subordinate to the state in the allocation
of scarce resources.
It is obvious that the changing relative contribution by state-owned enterprise
and private enterprise drives a dynamic transition in the role of the state to-
wards the custodial and midwife role of the East Asian developmental state.
Like Taiwan, South Korea, and Singapore, China has instituted an overall
growth strategy of modernization and technological innovation that provides
Figu re 4 - 3 Bivariate Relation Between Provincial State-Owned
Enterprise-Production/Gross Industrial Output and Marketization
Index, –
source: Data from National Bureau of Statistics of China; Fan and Wang ().
Marketization Index
State owned production / Total Gross Industrial Output
.2 .4 .6 .8 1
 
an institutional and political framework for intense collaboration and coop-
eration between the political and the business elites. e rst so-called indus-
trial policy (chanye zhengce) guidelines were implemented in ,2 when the
government perceived that the old planning apparatus was no longer suitable
to steer economic priorities—particularly industrial development—in China’s
economic development. Since then, the government has frequently revised
and reformulated industrial priorities in an eort to single out future win-
ners and losers in the ongoing structural transformation of the economy. e
government seeks to create an environment conducive to the growth of large-
scale rms that can eventually turn into big, multinational players who estab-
lish global brand names. Common instruments such as market entry regula-
tion, taxation, and loan decisions are part of the state’s tool kit to inuence
the direction of structural transformation (Lu ). In this sense, China’s
industrial policy is also actively involved in shaping market structures.
In parallel, the Chinese government developed a science and technology
program that relies on the mechanism of central planning and resource al-
location. Major institutions in charge of formulating the national science
and technology (S&T) plans are the State Science and Technology Commis-
sion and the State Economic and Trade Commission. A set of four mutually
complementary S&T programs builds the framework of China’s national
technology policy.3 Each program supports a close science-business interface
to secure innovation activities with good prospects for productivity growth
and to maximize the commercialization of research and development (R&D)
output. While the individual programs follow a set of distinct core objectives,
with specic tools to promote technological development, the planning in-
stitutions gradually adjust national priorities and targeted research goals in
response to the changing overall state development goals. Concurrent to the
structural changes within China’s research landscape, the central government
has gradually increased the relative role of R&D policies. In , the “Deci-
sion on accelerating scientic and technological progress” formulated a target
value of . percent of GDP for national S&T expenditures. Although China
has not yet reached its target value, the recent increase of R&D expenditures
over the last few years is indeed impressive. Between  and  the an-
nual R&D expenditures increased from . percent to .percent, meanwhile
surpassing even the average value of the EU- countries. e majority of
R&D expenditures accrue in the business sector, followed by R&D institutes
and universities. In parallel, the proportion of scientists and engineers in the
 
overall S&T population increased signicantly from  percent to  percent
between  and  (National Bureau of Statistics of China ).
e state’s modernization eorts are supported by massive investments
in China’s system of higher education. Overall educational funds increased
from . percent of GDP in  to . percent in . Government funding
equaled . percent of GDP in , and the remaining educational funds
were generated by tuition fees and nongovernment funding organizations
(State Statistical Bureau ). In terms of public expenditure of GDP on
education, China is comparable with Singapore and ranks only slightly lower
than Japan and Korea. Institutions of higher education enjoy special attention
and received  percent of government appropriations for education in .
e annual number of university graduates increased from only . million
in  at the start of the reform period to . million in . Due to China’s
centralized system of university entry exams, the structural composition of
university graduates is closely aligned with the specic needs of China’s eco-
nomic development. About  percent of China’s university graduates hold
a degree in engineering,  percent in business administration, and another
percent in natural sciences (National Bureau of Statistics of China ).
is makes China the biggest producer of engineers worldwide (with about
, graduates in ).
In contrast to Japan’s technological catching-up process, which basically
relied on the country’s own development strength, China’s reformers have
embraced foreign technology to jump-start national economic development.
Foreign direct investment (FDIs) emerged as a core element of the national
reform agenda from the outset of economic reforms in the late s. e state
promoted FDI to serve two complementary purposes: First, foreign invest-
ments obviously alleviated China’s capital constraint; second, the new FDI pol-
icies were designed specically to speed the country’s technological catching-
up process through channels such as reverse engineering, skilled labor turn-
overs, and demonstration eects. Special economic zones with generous tax
and scal incentives not only facilitated the inow of scarce capital, but also
served as entry ports for advanced technologies, Western-style management
techniques, and organizational blueprints. Country wide development of
technology parks and development zones facilitated an immense inow of
FDIs across China. Meanwhile, China ranks number one worldwide among
FDI recipient countries with an FDI inow of  billion USD in  (State
Statistical Bureau ). Steered by specic investment incentive schemes,
 
FDIs gradually shied from labor-intensive technologies toward capital- and
knowledge-intensive technologies. Local content regulations guaranteed that
national rms beneted from the growing FDI inow as suppliers of input
factors and machinery. More recently, local content regulations even included
R&D activities in order to deepen the technological exchange between multi-
national companies and local rms.
While the aforementioned programs represent many of the standard features
of national policies of developmental states (Evans ), state activities in
China’s politicized capitalism typically go beyond the provision of growth-
promoting strategies that indirectly encourage rm development. Due to
the overlap of political and economic markets in politicized capitalism, state
actors also enjoy opportunities to directly interfere at the rm level. Fig-
ure - highlights the dual role of the party-state and its representatives, as the
rule-setting body and as actively involved in rm transactions. In politicized
capitalism, the rm not only responds to market signals, but its performance
and economic success are also aected by its relations with state representa-
tives and the extent and quality of government involvement within the rm.
Due to weak legal and political checks and balances, legal limits to political
interference are largely absent. Although China has invested tremendous ef-
forts to bring its business laws and regulations into accordance with Western
practices, legal institutions are still weak and provide little protection against
state interference. A core feature of China’s legal reforms is to build legitimacy
for economic reforms and sustain transformative economic growth without
aecting the CCP’s monopoly on political power. Hence, the legal system is
still not independent from the Communist Party, and local courts remain in a
subordinate position in relation to the local party committees (Findlay ).
One can dierentiate between two distinct types of direct state interven-
tions at the rm level:
a) State involvement in market transactions of the rm, particularly to as-
sist and support business deals in state-controlled markets, and b) Direct state
involvement in the rm’s corporate governance.
State Involvement in Market Transactions
State involvement as a third party in economic transactions is widespread
when rms operate in partially liberalized or state-controlled markets. In such
 
cases, resource dependence theory predicts a voluntary construction of clien-
telist ties between rms and government in an eort to alleviate and mitigate
resource constraints. Political capital becomes an important asset and may
aect a rm’s success in securing business deals. Examples of state-controlled
or highly regulated markets are those for land-use rights, for public construc-
tion projects, for credit and for capital, as well as specic state production
monopolies such as tobacco and energy. Outcomes in these markets are not
fully determined through market mechanisms bringing supply and demand
into equilibrium; instead, business transactions are still heavily regulated and
controlled by the state. Hence, political capital embodied in personal relation-
ships between political and economic actors may provide crucial informa-
tion advantages or provide legitimacy and credibility for entrepreneurs that
eventually help to secure a business deal. By contrast, in competitive mar-
kets, market outcomes are determined by the price mechanism; hence, the
economic benets of political ties decrease. Market transition theory predicts
that the importance of political connections for business success is negatively
correlated with the degree of economic liberalization and marketization (Nee
; Bian and Logan ). Hence, in heavily state-regulated industrial sec-
tors and regions, entrepreneurs must cultivate personal connections with
Figu re 4 - 4 e Firm in Politicized Capitalism
Product market
 
powerful government bureaucrats to gain reliable access to resources and pro-
tect their rms from predatory interventions (Wank ; Xin and Pearce
; Peng and Luo ).
In our eld research involving  interviews with private entrepreneurs in
the Yangzi Delta in the summer and fall of , we found rich evidence sup-
porting the close connection between the extent of state control and the value
of political capital. Many entrepreneurs whose businesses competed in free
markets told us they do not invest in political capital. e general manager
of a computer company, for instance, clearly rejected the idea of playing the
“game of politics,” and explained, “In my sector, the government cannot give
me much, not much tax breaks, and not much government contracts.” By con-
trast, entrepreneurs in state-controlled and highly regulated markets, such as
the construction business, told us they invest considerable eorts to establish
close personal ties with the political elite. Especially for entrepreneurs who
depend on government contracts for their business, having strong political
ties with government is oen the decisive factor in business success. One en-
trepreneur in the water purication business in the Yangzi Delta remarked:
“Competitive bidding is just a form. It doesn’t involve the entire process in
terms of results . . . Political connections are still as important as before . . . If
some senior government ocial gives a signal we will get the project. Some-
times we lose bids, because someone else gets the nod from a senior ocial.”4
Government interference and inuence in regulated markets oen goes well
beyond the legal limits and involves corruption and bribery. A Chinese study
conducted in  reveals that about  percent of illegal land-use cases can
be attributed to local government malfeasance (Li ).
Resource constraints and the need to secure the “helping hand” of govern-
ment are particularly important for rms beyond a certain critical size. With
size, rm vulnerability increases, due both to increasing rent-seeking activi-
ties of government ocials and to resource dependence, so that good govern-
ment relations become a crucial factor in doing business. As one interviewee
pointed out, “Once you are big, you are in trouble. You must have good rela-
tionships with the government then . . . If the party wants you to die, you have
no way to live.”5 Managers and entrepreneurs develop and cultivate political
capital through the informal pursuit of old friendships with government of-
cials in social gatherings and family visits (particularly managers who held
previous positions in the government), and through nancial donations to
support government projects. ere is also the formal inclusion of govern-
ment ocials on so-called expert committees formed as a consulting body
 
to provide guidance in important rm decisions. Entrepreneurs in regulated
markets tend to make signicant nancial investments in maintaining politi-
cal connections. Our interviewees indicated that “social expenditures” of up
to percent of the contract value are expected; the investment might be a
higher percentage in smaller deals.6
Our anecdotal evidence from interviews with entrepreneurs in the Yangzi
Delta region is supported by data from the World Bank’s Investment Climate
Survey of , rms conducted in  in  cities in China. e survey was
conducted in two parts: one to be answered by the rm’s CEO and the other by
the CFO or accountant. Using this World Bank dataset, we compare the state’s
role in assisting business transactions in both types of market structures. As
an example of a state-controlled market, we focus on China’s credit market,
which represents one of the least-reformed sectors of China’s transition econ-
omy. For a case study of competitive markets, we chose China’s product mar-
ket, which (with few exceptions, i.e., state monopolies in tobacco and energy)
was the rst market to be liberalized in China’s economic reforms.
To assess the eect of political connections in both market structures we
chose to compare the eect of political capital as measured by direct govern-
ment assistance to the rm and the involvement of a party ocial in the rm’s
management. e party and government can best be described as a multi-
plex principal-agent relationship, with the party being the principal and the
government agencies representing diverse agents (Shirk , ). e local
party committees can therefore oer access to most administrative bureaus at
the local level. For instance, the party can provide an indispensable network
outside of which bank credit is much more dicult to access. Membership in
the CCP is oen regarded as a minimum requirement for a career as a profes-
sional manager—particularly in state-owned enterprises and in private rms
that exceed a certain size and inuence. A CEO with active involvement as
a party secretary, vice party secretary, or party committee member signals
a closer and stronger party aliation. According to the Investment Climate
Survey, more than  percent of the surveyed rms actually have a CEO who
holds an oce in the CCP. Some regional variation can be observed, with
more liberalized and reformed areas showing a smaller proportion of politi-
cally active CEOs and less-liberalized, economically backward regions show-
ing a higher proportion.
e banking sector is still dominated by four state-owned commercial
banks and three political banks. Although the state banks have been joined by
 joint-equity banks, about  regional city banks and private banks like the
 
Minsheng Bank (founded in ), the oligopolist structure of the Chinese
banking sector persists. e People’s Bank of China controls interest rates for
dierent kinds of deposits, state-owned banks still benet considerably from
their established branch network, and the state commercial banks are still
the central provider of nancial control. e Chinese government has imple-
mented only partial reform of the commercial banking sector. Recent reforms
show a surprising degree of inconsistency. For example, the Commercial Bank
Law (eective in ) guarantees the formal-legal independence of commer-
cial banks, but the law still emphasizes that loan decisions should be taken
under the “guidance of state economic policies” (art. ). Abundant evidence
conrms that China’s commercial banks are not independent in their loan
decisions (Zhu ; Leung and Mok ; Lin ). Political intervention is
still rife despite legal reform of banking to foster formal autonomy in lending
decisions. In , private rms and individuals received only about  percent
of short-term loans of China’s state commercial banks, including the four state
commercial banks, policy banks, and agencies of postal savings (China State
Statistical Yearbook : ). Even the newly founded joint-equity banks are
not completely immune from political interventions (Wong ).
e importance of political capital for a rm’s success in getting a bank
loan can be readily inferred from Figure -, which compares credit access
across  cities for rms that do not receive government assistance (le-hand
side) with those that do (right-hand side). Figure - shows that where the
CEO is politically well-connected and active as party secretary, rms have
greater success in securing bank loans.
at political ties play an essential role independently of the rm’s owner-
ship status is conrmed by Table -. With only two exceptions (listed rms
and collective rms with CEOs holding a party oce), both government as-
sistance and active party participation of CEOs are associated with greatly
improved chances to secure a bank loan. Although bivariate relations are of
course technically and methodically not appropriate to establish causal rela-
tionships, market transition theory and resource dependence theory both pro-
vide strong arguments supporting underlying causalities hinting at a strong in-
terventionism of political capital in China’s state-controlled nancial market.
Our ndings are also consistent with an analysis by Li et al. (), of a sample
of more than , private rms showing that political connections are helpful
in obtaining bank loans and tend to reduce discrimination by state banks.
A closer look at the sectoral distribution of government assistance con-
rms that political ties are used instrumentally to steer scarce capital into
 
Figu re 4 - 5 Eect of Government Assistance on Access to Bank Finance, 
source: Data from World Bank Investment Climate Survey, .
0 1
Credit access
0.150.14 0.14
0.32 0.32
0.23 0.24
0.29 0.29
Zhengz hou
Chanchu n
Zhengz hou
Chanchu n
Graphs by availability of government assistance to secure bank loans
 
Figu re 4 - 6 Eect of Politically Active CEOs on Access to Bank Finance, 
source: Data from World Bank Investment Climate Survey, .
0 1
Credit access
Zhengz hou
Chanchu n
Zhengz hou
Chanchu n
Graphs by party office of CEO
0.23 0.23
 
preferred industrial endeavors. Figure - provides evidence that government
assistance in loan applications is particularly common in China’s high-tech
sectors such as biotechnology and electronics, which enjoy priority in China’s
current industrial policy and technology programs. In the high-technology
Ta b l e 4 -1 Political Capital and credit access by ownership form
of rms
having a
bank loan
18.30% 12.29% 47.62% 15.33% 15.94%
government 44.32% 46.43% 62.96% 42.37% 42.24%
of rms
having a
bank loan
CEO without
part y oce 15.97% 14.88% 66.66% 16.99% 16.72%
CEO with
part y oce 24.83% 14.02% 40.00% 32.17% 32.17%
source: World Bank Investment Climate Survey .
Figu re 4 -7 Sectoral Distribution of Government Assistance
source: World Bank Investment Climate Survey, .
Metallu rgical products (manuf. & tools)
Food proce ssing
Chemical products & medicine
Transportat ion equip.
(incl. telec om & ship bui lding)
Biotech products & chi nese med icine
Business services
Infor mation t echnolog y
Accountin g & non-bank ing
fina ncial se rv.
Advert isement & m arketi ng
Auto & auto pa rts
Household ele ctron ics
Electronic equipment
Electronic par ts mak ing
Garm ent & leath er
government assist
0.03 0.05
 
Figu re 4 - 8 Government Assistance and Sales Performance
source: World Bank Investment Climate Survey, .
0 1
annual sales growth in 2003 (%)
Zhengz hou
Chanchu n
Zhengz hou
Chanchu n
Graphs by by availability of govern ment support to identify clients
35.46 34.99
 
sector, China’s policy is similar to that of other Asian developmental states
(Whitley ; Kang ).
Our analysis of the eect of political capital in product markets—our
counterexample of a liberalized market—reveals a completely dierent pic-
ture. Figure - shows that political ties do not in general improve sales perfor-
mance, as indicated in the comparison of rms without government assistance
in securing clients (le-hand side) and those that enjoy government sponsor-
ship (right-hand side). Only in Benxi and Xian does government assistance
appear to be associated with slightly improved performance. In general, gov-
ernment assistance in securing either domestic or international clients does
not aect the rm’s sales growth. Specically, as shown in Figure -, political
capital embodied in politically active CEOs does not result in stronger perfor-
mance in the rm’s sales.
Table - conrms our ndings for most ownership forms. With the ex-
ception of collectively owned rms, political ties and government support are
not linked to advantages on the product market. To the contrary, rms gener-
ally exhibit stronger growth in sales if they lack political ties in the form of
government assistance and politically active CEOs.
us, it is clear that economic benets generated by political capital de-
pend crucially on the extent of market liberalization. Consistent with market
transition theory (Nee ), positive payos of political capital are conned
to regulated and state-controlled markets, whereas political capital does not
yield any additional benets in competitive markets. Our results match well
with recent work by Li, Meng, and Zhang (), who analyzed determinants
of party membership of entrepreneurs. eir ndings show that the less de-
veloped the local market-supporting institutions and the less liberalized the
local markets, the more likely entrepreneurs are to enter politics.
State Involvement in Firm Decisions
e implementation of the Company Law promulgated in  has altered
both the quality and intensity of state intervention in the rm, depriving the
government of its former unchallenged monopoly rights and control over
former state-owned enterprises [Ed: restore]. In the s, state-craed in-
stitutional change established the framework for converting them into public
corporations. e objective was to transform loss-making state enterprises
into prot-making rms through corporatization and listing on stock ex-
changes. With the Company Law, the government sought to bring organi-
zational standards in line with Western-style corporate governance (Guthrie
 
Figu re 4 - 9 Politically Active CEOs and Sales Performance
source: World Bank Investment Climate Survey, .
 
), shiing power from the party and government to the board of directors
and the CEO as major decision makers within the rm (Wong, Opper, and
Hu ). State involvement in rm decision making, however, was not com-
pletely abolished. In an eort to not lose all control rights over China’s indus-
trial key sectors, specic aspects of established political governance structures
were maintained. Not surprisingly, this provided politicians and bureaucrats
with opportunities for direct intervention in the rm. e state is particularly
interested in maintaining involvement in large-scale modern corporations,
business groups, and conglomerates in core industries, either listed or un-
listed. Certain giant former state-owned enterprises, such as China National
Oshore Oil Corporation (CNOCC) listed on the Shanghai Stock Exchange,
are regarded as crucial in leading China’s bid as a global economic power.
Whether as a private rm that has grown into a major player in its niche or as
a former state-owned enterprise, the larger the enterprise, the more the state
becomes interested in guiding its future development. Two major channels
for direct interference can be identied: state ownership of shares and gover-
nance structures within the rm.
State Intervention via the Ownership Channel
Although China has witnessed a major privatization move, reducing the size of
the state sector by over  percent between  and , the government has
oen retained partial control rights in large-scale rms. Corporatization and
stock exchange listing have reduced the average state shareholding in rms
listed on the Shanghai Stock Exchange to about one-third of the rms’ total
shares. However, another third is held by corporatized state-owned companies.
Ta b l e 4 - 2 Political Capital and Sales Growth by Ownership Form
in %
27.35% 23.08% 30.09% 76.85% 97.06%
government 23.21% 38.17% 33.33% 27.66% 30.43%
in %
CEO without
part y oce 39.07% 20.25% 50.42% 75.54% 99.89%
CEO with
part y oce 22.49% 29.73% 13.30% 23.21% 17.89%
source: World Bank Investment Climate Survey .
 
us, on average,  percent of company shares are still under either direct or
indirect state inuence.
Bureaucrats maintain direct ties to such rms through their participa-
tion as members of the board of directors representing state-owned shares. As
such, they are entitled to represent the state’s interests in the rm’s strategic
decisions, albeit within the framework of an advisory capacity as stipulated
by the rules of corporate governance of the Company Law (Gensler and Yang
). us, while the rm’s top executive, the CEO, has full control over its
management, the state has a voice—the more so the larger its ownership share
in the rm—and votes on strategic decisions.
Such state participation in corporate governance, however, turns out to be
problematic. State asset administration is carried out by an institution that
serves as a representative of the central government. ese so-called state as-
set management companies usually have weak incentives to perform moni-
toring activities. First of all, their ocials usually do not receive any personal
benets from eective monitoring. Second, state shareholders do not operate
under hard budget constraints; even if budgets are admittedly hardened, state
shareholders can almost be sure to be bailed out by the state treasury if com-
panies suer nancial distress. Not surprisingly, corporate performance of
China’s listed companies is negatively related to the proportion of a company’s
state shares (Xu and Wang ; Qi, Wu, and Hua ).
Government ownership of course also invites intervention in corporate
governance beyond the regular board meetings and shareholder meetings.
e continuation of close rm-business relations and informal networks
among actors allow for ready interference in almost all types of rm deci-
sions. Government involvement in corporate governance of rms listed on
the Shanghai Stock Exchange is particularly pronounced when it comes to
decisions aecting nancial issues, that is, decisions on mergers, change in
shareholding structure, and on share placements and new issues. Overall per-
formance eects of this direct government intervention are negative, however,
showing the state’s inability to overcome the inherent incentive and informa-
tion problems of state ownership even aer a shi toward greater reliance on
market mechanisms (Nee, Opper, and Wong ).
State Intervention Through Politicized Governance Structures
State involvement is further exacerbated through the persistence of politicized
vertical command structures within the rm. Although the ocial policy line
 
was to encourage a complete separation of government and business func-
tions (zhengqi fenkai) to support a rationalization of the economic sphere,7
the reforms in actuality revealed a high degree of ambivalence and inconsis-
tency. In spite of the ocial propaganda, which claims to constrain the state’s
role to that of a normal shareholder without any priority rights to interfere
into the rm’s organization and governance, China’s new company legislation
reveals a more ambivalent position toward depoliticizing the former state-
owned enterprise.
To begin with, Article , Company Law, still calls for a supervision of
enterprises by the government and social masses. Inevitably, this claim may
create conicts with the intended enterprise independence. Even more seri-
ous decits of the ocial depoliticization strategy result from the continu-
ing inuence of the “three old political committees”—party committee, labor
committee, and trade union—placed within the rm. Despite the creation of
new organizational and governance structures, such as shareholders’ meet-
ing, board of directors, and supervisory committee alongside the position of
the CEO, the old political organs were not abolished. Instead, the Company
Law guarantees and regulates their future involvement and responsibilities.
Although the “old three” lost a large amount of their inherited coordination
and control rights, their survival invites a continuation of political involve-
ment in the rm’s decisions. Particularly their long tradition as central politi-
cal bodies within the rm provides fertile grounds for continuing informal
involvement (Wu and Du :). Figure - sketches the internal structure
and persisting links between the three old committees [lao san hui, i.e., party
committees, trade union, and workers congress] and new decision-making
bodies [board of directors, manager, and board of supervisors].
Article  of the Company Law species “the activities of the local branch
units of the CCP in a company shall be carried out in accordance with the
Constitution of the CCP,” but this constitution provides little additional clari-
cation of the party’s scope of involvement. It simply delegates the implemen-
tation of higher party decisions to local party committees and grants them
the right to “supervise party cadres and any other personnel.” More specic
was former General Secretary Jiang Zemin’s detailed sketch of the party’s ac-
tivities at the enterprise level. According to his guidelines, the party should
focus on four functions: () implementation of the party line, () fulllment
of party-related tasks with special attention to production and management,
() participation in the most important business decisions, and () support for
 
the board of directors, the supervisory committee, and management (Foreign
Broadcasting Information Service ).
Survey evidence conrms the active role of party committees. An in-depth
study of state involvement in listed corporations nds persisting party inter-
ference in almost all domains of the rm’s activity, with party committees
exercising an even stronger inuence in the rm than government bureaus
(Nee, Opper and Wong ). Local party committees exert the most control
in personnel decisions, especially the selection of managers of departments,
branches, and subsidiaries, and the selection and dismissal of vice chief ex-
ecutive ocers. In essence, party involvement concentrates on personnel is-
sues, which have been a central focus of the nomenklatura system for decades
of socialist planning (Shirk :). e fact that local party units tend to
have a high level of involvement in decisions assigned de jure to the enterprise
manager suggests that they may use the manager’s oce as their venue for
interventionist activities.
Party inuence within the rm may be even stronger if the CEO is actively
involved in the party and holds a party oce. Particularly in large- and medium-
size rms, management positions are oen lled by politically active mem-
bers of the CCP. e previously mentioned Investment Climate Survey of
, rms found that more than  percent of CEOs concurrently hold party
positions. Although politically active CEOs are naturally most common in
Figu re 4 -10 Corporate Governance of China’s Listed Firms (According to
Company Law)
source: Opper ().
Shareholders Meeting
• Shareholder representatives
• Employee representatives
rights in
rights to
has a voice in
major firm
delegates rights to
elects employee representatives supervises
Board of Supervisors
• Shareholder
• Employee
elects and appoints
elects and
 
state-owned enterprises (with more than  percent of CEOs holding a party
position), political participation of management personnel is also widespread
in non-state-owned rms. Fiy-seven percent of CEOs in the surveyed listed
rms and  percent of CEOs in ocially registered private rms held party
oces. Recruitments of politically active CEOs are oen motivated by an ef-
fort to gain information advantages and utilize political capital to mitigate
resource constraints, that is, in access to credit markets and markets for land
and construction permits.
Conicts of interests arise easily, as the Company Law lacks mechanisms
to align the party committee’s interests with the rm’s performance. e party
committee has neither residual claims nor benets from local tax revenues.
Party members, moreover, are insuciently insulated from patron-client ties
and may easily be “captured” by interest groups or be tempted to maximize
their own self-interests. In sum, the party committee presides over a politi-
cal network in the rm that can be used to mobilize informal opposition to
reform policies that threaten vested interests in the rm. Our own interviews
revealed conicts of interests over labor issues as well as in strategic decisions,
such as investments beyond the borders of the local locality.
Party intervention inrm decisions can have negative eects on perfor-
mance. Based on data from  listed rms at Shanghai Stock Exchange speci-
fying the extent of party intervention in  distinct rm decisions overall,
Nee, Opper and Wong () found evidence for such negative eects (on “re-
turn on assets” and “return on equity”) for party interference, particularly,
in nancial decisions. is contributes to explaining why SOEs are unable
to compete eectively with private enterprise. Interventions by the state in
listed rms in which the state is a major shareholder have a negative eect on
the rms’ economic performance at a time when they face increasing market
competition from private enterprise.
Our analysis has sought to highlight the structural and organizational
features of politicized capitalism as a hybrid institutional order. e focal
question is whether China’s politicized capitalism is a new type of capital-
ism that will endure and complement the landscape of capitalist systems.
e construction of politicized capitalism by means of ad hoc improvisa-
tions responding to the demands of rapid market-driven economic growth
 
is a source of institutional continuity. Given the central role of the state at
the outset of reform, path dependence alone would dictate a strong state
component in the constitution of the new Chinese capitalism. Aer all, the
same state that managed production and distribution under central planning
guides the transition to capitalism.
e dilemma of state involvement in guiding economic life, is that, on the
one hand, state intervention is associated with negative eects on the rm’s
performance when state bureaucrats directly inuence decision making in the
rm. On the other hand, in spite of negative performance eects, rms are
not able to completely distance themselves from state actors as long as they
depend on access to scarce resources controlled by the state in regulated mar-
kets such as the credit market or the market for land-use rights. Hence, po-
liticized capitalism currently rests on lock-in eects in sectors where political
and economic markets interact to blur the boundaries between the state and
the rm. Large-scale, capital intensive rms dependent on state-controlled
resources and rms in sectors characterized by a high dependence on gov-
ernment contracts such as the construction and the real estate business have
strong economic reasons to accept and cultivate close state-rm relations.
Moreover, partial state ownership in recently privatized state-owned enter-
prises provides ample opportunities for direct state intervention in corporate
governance. If politicized capitalism persists in Nash-like equilibrium, then
the structural and organizational interpenetration of political and economic
markets will remain as incorrigible features of Chinese capitalism.
Notwithstanding lock-in eects of path dependence, politicized capitalism
as a hybrid order itself embodies organizational dynamics of market transi-
tion. As evident from the contrast in utility of political capital in product and
credit markets, the benets from close state-rm relations mainly stem from
the governments’ ability to provide access to scarce resources and on state-
owned enterprise. We infer from this that politicized capitalism is to an extent
largely bounded within the state regulated and controlled sectors and con-
strained by the extent and size of the market economy. Small- and medium-
scale rms, for example, operating in close-knit local business networks and
in competitive markets are oen able to distance themselves from the state in
securing nancial capital. It is estimated that about – percent of China’s
total capital investment is allocated outside the banking system (Tsai ).
Friends, families, private founders and even business partners establish a reli-
able lending network that provides mutual loan opportunities. Several of our
 
interviewees pointed out that they prefer private lending to bank lending as
an ecient and exible way of getting short-term capital. Moreover, a deepen-
ing market transition is under way, partly enforced by commitments to liber-
alization specied in China’s World Trade Organization accession contract.
In addition to the growing share of domestic nonstate nancial institutions,
increasing competition by foreign nancial institutions will help to liberalize
China’s credit market, though progress is expected to be slow and gradual
due to the extended branch networks China’s state-owned banks can rely on.
Hence even in the banking sector, currently the most regulated sector, the
trend is clearly in the direction of liberalization.
Overall, we show that China’s politicized capitalism is still in dynamic
transition. Fiscal decentralization and the continued rapid growth of the in-
dustrial output contributed by the private enterprise sector encourage interest
in shiing to the custodial and midwife roles characteristic of mature East
Asian developmental states (Johnson ; Amsden ; Wade ; Evans
). Following the privatization of small- and middle-sized state-owned en-
terprises in the early s, local governments are less involved in inuencing
economic decisions within the rm as they attempt to improve the business
environment to attract entrepreneurs and investments to their region. It is not
too far of a stretch to imagine that reformers might eventually want to include
in their ambitious reform agenda a national commitment to constructing a
modern polity wherein open electoral politics moves China beyond an out-
dated Communist Party dictatorship. It would take such a reform for China
to move decisively beyond politicized capitalism to emerge as a mature East
Asian developmental state, where the state and its bureaucrats operate within
the framework of an independent legal system, which guarantees clear and
distinct state-rm boundaries where private actors are shielded against arbi-
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*We wish to acknowledge the support of the John Templeton Foundation, which
funded the research for this essay.
 
. Respondents are asked to assess whether the bureaucracy hinders business
. e rst industria l policy guideline was the Guowuyuan guanyu dangqian
chanye zhengce yaodian de jueding,” released by the State Council on March , .
. e so-called Spark program (since ) supports rural development; Pro-
gram  (since ) currently emphasizes education in the elds of automatization,
computer-aided design, and computer integrated manufacturing systems—technolo-
gies, medical apparatus, biotechnology, and material sciences; the Torch Program
(since ) focuses on the provision of research infrastructure; and the Key Tech-
nologies R&D Program provides support for R&D in key industrial sectors.
. Inter view conducted November , , in the Yangzi Delta.
. Interview conducted on November , , with the founder of a rm produc-
ing building material in the Yangzi Delta.
. Interview conducted with a supplier of construction material on November ,
, in the Yangzi Delta.
. is context was mentioned in “Gufenzhi qiye shidian banfa” (//),
Chapter , line , in Zhongguo Renmin Daxue Jinrong yu Zhengquan Yanjiusuo (Eds.),
. A statement by Wang Zhongyu, Secretary General of the State Council, fur-
ther details: “e rst (aim) is to accelerate the separation of government functions
from enterprise management, make further eorts to change government functions,
reform the relationship of administrative subordination between the government and
enterprises, comprehensively realize the decision-making power of enterprises, relieve
the competent government departments of their relationship of administrative subor-
dination with the economic entities run by them or the enterprise directly managed
by them, and thoroughly cut their ties in terms of manpower and nancial resources”
(Xinhua, February , ). In this spirit, the tenth -year plan species, “to complete
the establishment of a modern enterprise system under which there will be clearly es-
tablished ownership, well dened power and responsibility, a separation of enterprise
management from government administration, and scientic management” (Xinhua,
March , ).
... Whilst there are some parallels between these earlier contributions that typically sought to classify and analyse the Soviet Union or Nazi Germany, we focus on texts that use the term 'state capitalism' as well as related concepts, such as 'politicized capitalism' (Nee & Opper, 2007), 'state-led capitalism' (Zhang & Whitley, 2013) and 'new statism' (Wood & Wright, 2015), to cover a much wider range of countries; even liberal markets may have strong state capitalist elements (ibid.). In contrast to earlier contributions, especially those that examine the Soviet Union, the current term 'state capitalism' does not 1) place as much emphasis on state-led central planning as the preeminent means to co-ordinate economic activity and 2) require the state to own nearly all means of production (Bremmer, 2010a;Musacchio & Lazzarini, 2014;Nee & Opper, 2007). ...
... Whilst there are some parallels between these earlier contributions that typically sought to classify and analyse the Soviet Union or Nazi Germany, we focus on texts that use the term 'state capitalism' as well as related concepts, such as 'politicized capitalism' (Nee & Opper, 2007), 'state-led capitalism' (Zhang & Whitley, 2013) and 'new statism' (Wood & Wright, 2015), to cover a much wider range of countries; even liberal markets may have strong state capitalist elements (ibid.). In contrast to earlier contributions, especially those that examine the Soviet Union, the current term 'state capitalism' does not 1) place as much emphasis on state-led central planning as the preeminent means to co-ordinate economic activity and 2) require the state to own nearly all means of production (Bremmer, 2010a;Musacchio & Lazzarini, 2014;Nee & Opper, 2007). By reviewing this current work, we seek to 1) define what 'state capitalism' is (and is not), 2) demonstrate how the dimensions of state capitalism vary and 3) put forward a range of Weberian 'ideal types' of state capitalismin other words, to put forward the dimensions along which state capitalisms vary as well as to specify the means that state capitalisms seek to achieve their objectives. ...
... As we show below, there is no consensus on the basic dimensions for state capitalism; however, definitions of state capitalism often set out 1) the purpose of the state's involvement in the economy and 2) the different mechanisms that the state has to try to achieve its objectives (Bremmer, 2010a;Fainshmidt, Judge, Aguilera, & Smith, 2018;Wood & Wright, 2015;Zhang & Zhu, 2018). As the purpose of the state's involvement in the economy may be to improve specific economic outcomes, research has assessed the effects of state capitalism across a range of outcomes, including firms' financial performance (Nee & Opper, 2007;Tihanyi et al., 2019), overall national economic performance (Bremmer, 2010a) and firm innovation (Zhou, Gao, & Zhao, 2017). Such research has also examined how countries move between different forms of state capitalism (Zhang & Whitley, 2013). ...
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The recent rise of companies from emerging markets, especially China, has led to a slew of studies based on the concept of 'state capitalism'. However, definitions of this term vary significantly. We review how various leading authors use the term state capitalism to draw out differences between, and similarities within, those conceptualizations. By doing so, we seek to 1) define what 'state capitalism' is (and is not), 2) demonstrate how the dimensions of state capitalism vary and 3) put forward a range of Weberian 'ideal types' of state capitalism. This enables us to highlight the dimensions along which state capitalisms vary as well as to specify the means that state capitalisms use in an effort to achieve their objectives, opening up important new areas for inter-disciplinary research.
... (Hu, Cui and Aulakh, 2019;Kohli, 2004;Musacchio and Lazzarini, 2014). However, this ownership effect is contingent on external variations of the dominant logic across regional (Banalieva et al., 2015;Shi et al., 2012;Sun, Qu and Liao, 2018) and industrial (Nee and Opper, 2007) domains. Thus, our study explicates the influence of state and market logics, manifested through ownership, regional marketization, and industry regulation, on corporate strategy. ...
... Specifically, the market logic is promoted through pro-market reform at the regional level (Banalieva et al., 2015;Shi, Sun, Yan and Zhu, 2017) whereas the state logic is introduced through industry regulation (Aghion, 2011;Kohli, 2004;Nee & Opper, 2007). ...
... The first type of state logic legitimizes the melding of the state's political power with capitalist tools to promote economic development (Nee & Opper, 2007;Witt and Redding, 2014). This logic is reflected in direct commercial economic activities by the state through the means such as state-owned enterprises (SOEs), corporatized government agencies, public-private partnerships, hybrid ownership enterprises, and sovereign wealth funds (Bremmer, 2009;Wood and Wright, 2015). ...
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We study how state and market logics, which operate both internal and external to the firm, jointly influence firm strategy. In the context of the Chinese financial intermediary industry, we argue that the level of state ownership in a firm has an inverted U-shaped relationship with the firm’s financial portfolio diversification. This is because firms prioritize financial investment options that serve the dominant logic. As a result, their financial portfolios are more diversified when the multiple logics are balanced than when either logic dominates. This relationship is attenuated by the prevalence of market logic in the regional institutional environment and amplified by industry regulation aimed at correcting market failure. We test these arguments using panel data of Chinese trust companies during a period of de-regulation and re-regulation and find empirical support for the moderated curvilinear effect of state ownership. Our findings demonstrate the relevance of the institutional logics to analyzing firms in contemporary China and highlight how institutional logics at multiple levels jointly shape corporate strategy.
... The majority of these studies focus on the network embeddedness of entrepreneurs and managers of domestic firms in China. This empirical setting is both appealing and instructive, given the country's particular interpretation of "rule by law" (Lubman, 2006) and its hybrid business system, which combines numerous market institutions with continuing state ownership and tight regulatory control, leaving abundant room for political ad-hoc interference in critical factor markets (Boisot & Child, 1996;Lardy, 2019;Nee & Opper, 2007). The country focus, however, should not distract from the general applicability of the network-strategy argument. ...
... The more regulation, less rule of law, less voice, and less accountability exist, the more leeway there is for government and political representatives to intervene in market outcomes. Nee and Opper (2007) coined the term politicized capitalism for systems characterized by substantive overlap between the economic and political spheres (more neutrally, Boisot and Child (1996) refer to network capitalism). On the one hand, state policies reserve distinctive functions for party and government representatives not common in liberal market economies and designed to establish a closer proximity between management and party representatives. 1 On the other hand, managers and firms are incentivized to seek and cultivate political ties inside and outside the organization because politicians and government representatives enjoy considerable discretion in their role as gatekeepers in most of 1 For instance, China's Company Law (Article 19) makes it mandatory for every company to have a Communist Party unit within its organization, which (according to the Constitution of the CCP, Article 33) is charged to "promote the healthy development of the enterprise." ...
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Almost two decades ago, Asia Pacific Journal of Management , 19(2/3): 251–267 Peng (2002) called attention to the promise of institution-based strategy research. The puzzle was to explain differences in strategies around the globe. Building on the work accomplished so far, I ask: Can institution-based strategy succeed when embedded in inappropriate social networks? Institutions and networks are usually studied as separate phenomena, yet each also defines the capabilities of the other. Institutions shape social network contacts and structures because institutions define opportunities for affiliation and the relative value of distinct contacts and network structures. At the same time, social networks shape institutions and organizations’ capabilities for institutional innovation. Thus, the social network in which a manager or organization is embedded can either amplify or counteract success in implementing institution-based strategy. After I review the co-constitutional nature of institutions and networks and discuss a number of sample studies using China as a productive research site, I sketch questions that need to be answered to more tightly integrate network behavior into institutional strategy research, and discuss four emerging areas of research into how network-strategy fit affects performance: (1) network fit to adaptive strategy, (2) network fit to change strategy, (3) institutional dynamics and network-strategy fit, and (4) institutional distance and network-strategy fit.
... Children of the former economic elites (capitalists) from the pre-revolutionary society have no way to become market elites, as the market per se has been eliminated (Davis 1992;Goodman 2000). 1 Yet what happens in a transitional society that stands between these two ideal types? Politicized capitalism is one of these transitional forms (Nee and Opper 2007;Szelenyi 2013). It is characterized as "capitalism" rather than, for example, state socialism because even those who hold state power rely on the market for profit. ...
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This article documents and conceptualizes a mode of reproduction of elites in a society in transition from state domination to market orientation. By focusing on China’ marketization, we explore how parents’ advantageous backgrounds have influenced the chance of their children’s attainment of certain elite positions (administrative, technocratic, or market) and whether these patterns have varied across three periods (1978–1992, 1993–2002, and 2003–2010). Using data obtained from the 2011 China Social Survey, we find that although parents’ advantageous status has a persistent effect on children’s status attainment, the reproduction of the state elite and market elite still follows two separate tracks: the children of cadres do not show significant advantage in the process of becoming entrepreneurs and managerial elites, and the children of entrepreneurial and managerial elites are less likely to join cadres. We also find that the effects of the reproduction model are still enhanced and shaped by state power in different periods. These findings demonstrate the important interplay between family background and contextual inequality and give a deeper understanding of the different trajectories of elites in contemporary China.
... 4 For a similar position see Bell (2008). 5 Before the U-turn, Nee and Opper (2007) called China "politicized capitalism". Huang (2008) wrote about "capitalism with Chinese characteristics". ...
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More than 40 years ago, János Kornai introduced his famous supermarket metaphor. Socioeconomic systems cannot be constructed from purposely selected features, similar to customers in a supermarket, who can freely put into their shopping trolley whatever they like. Systems constitute an organic whole. They contain good and bad features in fixed proportions. After 1990, Kornai and most Western commentators expected that as market integration and private property expand, China would eventually turn into a liberal democracy. Prior to the worldwide fall of communism, Kornai had three primary criteria to determine whether a country was socialist or capitalist; later he amended this with six secondary ones. The present paper introduces into this list an additional 11 criteria—i.e. 20 quantifiable metrics altogether. Kornai was among the very first to recognize that with President Xi Jinping taking charge, China made a U-turn. While capitalist elements remain strong, in the final analysis, the country is on its way back to where it was before 1978.
... On the other hand, Faccio et al. (2006a) identified a firm as connected through a minister or head of state when the politician or a close relative (son or daughter) holds the office and is a large shareholder or senior officer. Similarly, political connections also defined as connections with individual who have power in the government (Belkaoui, 2004), through state ownership of enterprises (Bushman et al.2004 andNee et al. 2007) and through golden (special) shares held by government (Hanousek et al, 2007). ...
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In this paper, the study summarizes the major studies addressing on the power of political connections that have impacts on the role of audit committees and corporate governance in the companies. The question addressed by this paper is how the political connections and audit committee role may influence the corporate governance variables as reflected in audit fees and corporate governance behavior through auditor’s assessment process. This is what has been lacking in the literatures. This paper is an attempt to identify the gaps and contribute to the political connections and corporate governance literature by showing the political connection influences on audit committee especially in an economy in which the government has coercive power in the firms. In the different context, the paper provides avenue to potential research to understand firm’s agency conflicts between the majority shareholder and the management as well as political connections that providing external resources to the firms affect auditor’s decision on audit fees, audit plan and assessment process and audit opinions.
While Europe has become the principal venue for new Chinese foreign direct investment, little of it has resulted in new (greenfield) production or research and development facilities. The bulk of this investment has been used to take over European companies, outstripping Chinese acquisitions in North America by 800 per cent. While some takeovers have been of insurance, sports, luxury goods and similar non-strategic companies, many have been of innovation-driven firms. This article explores the reasons for the preference — by Chinese state- and privately owned companies — for takeovers of this type of European company. Its working hypothesis is that there are correspondences between the continuing weaknesses in China's innovation system and the fact that Chinese companies have been partially shut out of the US and Japan, leading to the focus on cutting-edge technological acquisitions in Europe. While these correspondences cannot be proven empirically, the article suggests that, given the available evidence and the context in which it arises (particularly the Chinese government's ‘Made in China 2025’ industrial agenda), the balance of presumption must be that these are key dynamics driving China's European acquisitions programme. Amongst its conclusions, the article suggests that Chinese corporate takeovers arguably problematize the future of European innovation and competitiveness and thus the technological robustness of Europe's economic development.
In recent years Europe has become a primary focus for Chinese investment. In the context of the rolling out of Chinese government plans such as its Belt and Road Initiative and ‘Made in China 2025’ industrial strategy, and the fact that many Chinese companies are either controlled or influenced by the Communist Party, major consequences for Europe's economic development — and its social, political and geopolitical corollaries — are now in train. The analyses presented in this special issue significantly advance our understanding of the dynamics and consequences of China's deepening economic engagements in Europe. They do so particularly in relation to the contentious issues surrounding corporate acquisitions by Chinese companies, the security problems associated with some investments and the impact of China's investment finance. This introductory article offers an institutional framework for comprehending the other articles that constitute the special issue and provides summaries of their contents. Additionally, it provides an assessment of how the special issue's contribution advances our understanding of China's externalization and its implications for European economic development.
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This longitudinal case study identifies corporate governance responses in a Chinese state-owned enterprise facing institutional logic multiplicity and demands to shoulder sociopolitical responsibilities beyond economic responsibility. We find that overseas listing led to the incorporation of market logic into an enterprise in which party-state logic prevailed. The prioritization of sociopolitical responsibilities vis-à-vis economic responsibility has shifted through three phases, reflecting changes in institutional logic centrality amid changing politico-institutional and firm conditions. In response, the enterprise developed hybrid corporate governance structures based first on decoupling (2001–2011) and then on translation of a “foreign” corporate governance model to fit the domestic context (2012–2016) but has since sought to dehybridize by strengthening the state-controlled governance structure (2017–2019). Our study contributes to the varieties-of-capitalism approach to corporate governance and offers perspectives on institutional change, institutional logic, and hybrid organizing as well as the implicit ethical issue.
Existing theorization of the processes of urban transformation in different world regions has been based upon diverse interpretations of the interplay between the state and market forces. Studies of the growth and transformation of Chinese cities are characterized by continuing debates between those who insisted on the pivotal role played by the Chinese Party-state and others who envisioned urban China as moving decisively toward capitalism. This research examines the pattern and process of land marketization in urban China as a case to understand the interaction between the state and market forces in China’s ongoing urban transformation. Statistical analysis of the data for the Chinese cities at and above the prefectural level for the years of 2003–2017 has identified an uneven geography of land marketization effectively shaped by a localization of state-market interplay. A significant and positive correlation is found between the degree of land finance and extent of land marketization. The uneven geography of land marketization is significantly influenced by the legacy of the socialist planned economy as measured by the dominance of state-owned enterprises. However, the strength and direction of the correlation between the state and market are found to be contingent upon the level of urban economic growth. Spatial variation in land marketization is also shaped by the degree of openness, local state policies toward industrial vis-à-vis commercial and residential land supply, population density, and the size of the city. Findings of this research call for a theoretical reconsideration of the state-market relationship in urban transformation more attentive to local conditions.
The neo-traditional image of communist society differs fundamentally from the images of totalitarianism and group theory. It shares with the totalitarian idea a focus on the distinctive communist institutions that foster organized political control, and it shares the premise that these forms of organization shape patterns of association and political behavior in distinctive ways. The neo-traditional image stresses the social network as its main structural concept. The elements of workplace organization—generic features of modern communism—give rise to several other features of factory political life and authority relations that complete the definition of the type. Communist neo-traditionalism guides comparisons of industrial authority by focusing on organized dependence and institutional culture of the factory. The chapters included in this book explore the characteristics of neo-traditionalism in Chinese factories. They also determine the ways that the Chinese variant has diverged from the Soviet.
With the world's largest market nearing full telecoms liberalisation, and the world's biggest operators facing stagnation in their home markets, they are eyeing up a major opportunity.