In The Micro-foundation of China's Market Economy, Liu Xiaoxuan tells a riveting tale of the reform-era transformation of China's business enterprises. The book is part of a series originally published in Chinese to commemorate 30 years of reform and opening. Eight of the 15 volumes from the original series have been translated and abridged for an English series published in Singapore.
The four core chapters of the book are devoted to four broadly defined enterprise types: state-owned; non-state domestic (minying); joint stock, many of which involve both state and non-state owners; and foreign-invested. Layered against the common backdrop of China's transition from a command to a market economy, the four stories weave together to yield an overall coherent and logical depiction of the way in which enterprise form and behaviour have co-evolved with the economic environment. A rich assortment of case studies fleshes out analytical points, and reviews of a wide spectrum of empirical work from both Chinese and English literature support interpretive claims. Evidence in this body of empirical work is Liu's own extensive contribution from a career spent studying enterprises at the Chinese Academy of Social Sciences.
An opening chapter presents data for the period 1978–2006 on numbers of enterprises and measures of activity for the full panorama of enterprise organizational forms. Problems of evolving categories, murky and permeable boundaries, and even deliberate obfuscation (as when private firms masqueraded as “red hats”) are identified, and measurement breaks in series are explained. A concluding chapter provides summaries of the four core chapters and lays out the author's concerns about the present state of Chinese enterprises and her recommendations for policy.
Major historical markers resonate through each of the four enterprise narratives. The launch of reform and opening in 1978 brought greater autonomy and incentives to state enterprises and an opening for non-state enterprises to develop. “The political incident of 1989” precipitated a sharp economic downturn that hit non-state enterprises particularly hard as state enterprises benefited from increased government favour. Deng's southern tour in 1992 signalled a renewed impetus for reform. Red hats were removed to unleash the vitality of private enterprise and inflows of foreign direct investment escalated. The year 1994 saw a levelling of the market playing field with unification of dual-track pricing, reforms in fiscal and enterprise accounting systems, and implementation of the Company Law which paved the way for joint stock corporations (JSCs) to proliferate. State enterprises were increasingly left behind in the competition as they focused on jockeying with authorities rather than responding to market forces. With functioning product markets in place, however, the way forward lay in breaking state enterprise dependency on government patrons. In 1998, housing was widely privatized, freeing enterprises from their landlord function, and the line ministries were abolished, ending the state's dominance in allocation of key resources. Small and medium state enterprises were forced to live or die by the market with privatization offering the surest path to survival. Large state enterprises were generally able to consolidate their positions in industries shaped by economies of scale and other barriers to entry. China's accession to the World Trade Organization in 2001 stimulated a resurgence in foreign investment inflows along with extremely rapid economic growth under which JSCs gained the ascendance.
Joint stock restructuring has been actively pursued by both private and state enterprises. Many JSCs have found advantage in bringing state and private shareholders into the same fold. Liu's own research shows such mixed shareholding to yield better performance results than exclusive ownership of either private or public varieties. By bringing in state shareholders, private enterprises become more competitive through privileged access to capital markets and other entitlements of government connection. By bringing in private shareholders, state enterprises escape excessive government interference and gain more leeway in rewarding entrepreneurial energy. Liu sees such advantage in mixed shareholding as an outgrowth of market imperfections and a sign of the immaturity of China's market system. Ultimately, she believes, the preference for this enterprise form will mark another passing stage in China's transition.
This book is written with the authority and insight of one who has been a critical observer of Chinese enterprises since the reform era began. Unfortunately, the translation does not do justice to the lively read of the original. The English narrative is plodding. Unfortunately as well, tables and figures are awkwardly rendered with units of measurement sometimes omitted and variables often not clearly specified. Nevertheless, the author drives home her main points so effectively that poor translation and weak graphics do not obscure them.
