Beyond Privatization: Institutional Innovation and Growth in Chinas Large

State-Owned Enterprises
By Ana Celene Rojas Perez

This reading demonstrates that big state-owned enterprises in China are not as inefficient and bad as
some important institutions and economist had said they are, instead Chinese planners follow their own
way to reform new institutional forms that do not fit into existing patterns. Because they were aware of
the unsuccessful reform experiences in other countries for example Ex-Soviet Union, in which they
proceed with a big bang transition and privatized immediately most of their big companies, the results
that ex-soviet Union achieved weren't the expected ones., As we know China is a very successful
economy and an example of economic growth for all the world, so this makes us think that every country
needs to find its own way to economic growth and development, because the measure o policies that
used to work for one country, definitely is not going to work exactly the same in another region, instead
those policies can harm countries economy.
China has been changing its institution through the combination of central policy, local initiative and
interaction with international investment.
Transition orthodoxy followers as the International Monetary fund though that most of the large-scale
stated-owned enterprise sector need to close down in order to promote the creation of new small and
medium-sized enterprises because these small enterprises were supposed to be the creators of
industrial growth. Also, the International Monetary Fund was the promoter of free international trade but
Chinese planners knew that first, you need to have a stable and competitive national market that can
survive to foreign international firms and then you can liberalize market for international trade. A good
government must support the national firms and companies of all types with subventions, import controls,
tariffs, low-interest credit. In order to create a strong industry and a competitive market who can deal with
international competition.
Although state ownership was against the international recommendations for reform and modern markets.
One of the main ideas in that period was the transferring of ownership to individuals in order to achieve
efficiency, because it was thought stated-owned enterprises were old, bureaucratic and profitless.
But as history has proof in several countries as Japan, Korea, the UK. Fist a country need to have a big
and large-scale industry in order to promote development because if there is a big industry, it will attract
others companies and promote the creation of suppliers companies, so it will create a spillover effect in
the economy, also if you have a large firm is more likely that this company can be an international
corporation because its capacity will be greater and could sell their product all around the work. This was
method was used in many countries, that's why we know very famous international brands as Toyota,
Nissan, Samsung, etc.
But it's important to mention that the success of all these international firms and corporations was
because they had at some point in history help from their own governments, first as a buyer of their
services or products and then as a protector of their markets. Most of these big enterprises and firms at
their beginnings used to have government support because this country wanted to have in its market that
kind of products and reduce imports, and also they were the suppliers of its governments. Once they
were solid enterprises each of their government protected them either with subventions or high tariffs to
import substitute goods.

In contrast to transition orthodoxy , the Chinese government had supported the growth of big statedowned business and firms that can compete in international markets.
China realized that in order to reform its economy and market need to build modern and big businesses
under new circumstances, as I mentioned before, it was also needed to protect and support emerging
big enterprises and firms, and foreign investment attraction was fundamental.
After an increasing foreign direct investment in the early 1980s, China tightens its control over foreign
investors. Chinese leaders thought that they should guide the orientation of foreign direct investment in
accordance with the states industrial policies and also towards infrastructure projects and upgrading
existent technology in order to secure technical transfer from multinational companies.
Foreign trade was also fundamental to China, so they encourage exports and organize imports according
to its needs.Chinas transition was different from that of other countries because chines planners have
proceeded experimentally, china did not sell their SOEs immediately instead , she gave to companies
market-oriented incentives. Maoist china was dominated by small firms, in Russia case, most of their firm
were big State Owned firms in that way privatization was harder for Russia.

As we know China used to be an isolated country, in the reform period leaders realized that an integrated
economy was needed for modernization. They were aware that big bang transition and unplanned
integration could create problems, so instead of open, its market to free trade and free movement of
capital, the governments intention was strategic and gradual integration.
Even when the foreign direct investment was allowed in china, it was under a lot of control and conditions
under which foreign investors could operate. Also from 1970s to 1990s, Chinese government maintain
import restrictions in order to protect its unmatured market. After China, admission to the World Trade
Organization, and pressure to reduce protection from the USA, china reduce its tariffs.
China has been one of the most criticized countries. World Bank and other economist considered that
privatization of state-owned enterprises was the only way to reform the economy. For they SOEs were
mere profitless and inefficient enterprises. Luckily
China didnt listen to them. Instead, China
followed its own created path toward institutional and technological reconstruction, so they understand
that the best way to achieve this was to improve its bureaucracy and large firms instead of destroyed
them.

References:
Peter Nolan and Wang Xiaoqiang, Beyond privatization: Institutional innovation and growth in China's
large state-owned enterprises, World Development, Volume 27, Issue 1, January 1999, Pages 169200