Hayek (1945) argues that local information is key to understanding the efficiency of alternative economic systems and whether production should be centralized or decentralized. The Chinese experience ...of decentralizing SOEs confirms this insight: when the distance to the government is farther, the SOE is more likely to be decentralized, and this distance-decentralization link is more pronounced with higher communication costs and greater firm-performance heterogeneity. However, when the Chinese central government oversees SOEs in strategic industries, the distance-decentralization link is muted. We also consider alternative agency-cost-based explanations, and do not find much support.
We examine the role of firms' government connections, defined by government intervention in CEO appointment and the status of state ownership, in determining the severity of financial constraints ...faced by Chinese firms. We demonstrate that government connections are associated with substantially less severe financial constraints (i.e., less reliance on internal cash flows to fund investment), and that the sensitivity of investment to internal cash flows is higher for firms that report greater obstacles to obtaining external funds. We also find that those large non-state firms with weak government connections, likely the engine for innovation in the coming years in China, are especially financially constrained, due perhaps to the formidable hold that their state rivals have on financial resources after the ‘grabbing-the-big-and-letting-go-the-small’ privatization program in China. Our empirical results suggest that government connections play an important role in explaining Chinese firms' financing conditions, and provide further evidence on the nature of the misallocation of credit by China's dominant state-owned banks.
Since little is known about the long-run effect of treated water, we examine the educational benefit to rural youth in China from a major water treatment program started in the 1980s. By employing a ...data set covering two decades and encompassing more than 4700 individuals between ages 18 and 25, we find that, on average, the program increased the completed grades of education of rural youth by 1.1years. Moreover, the effect was highly heterogeneous across gender and age of exposure. Rural girls benefited from water treatment more than rural boys such that the water treatment program completely eliminated the gender gap in education in treated villages. Young rural people with access to treated water in early childhood experienced significantly higher gains in schooling attainment (i.e., by more than a year) than those that gained access at later stages of life. Our analysis suggests that this program was cost-effective.
We use data from a large survey of Chinese firms to investigate whether local government efforts to facilitate market development improve firm efficiency. Both government provision of information ...about products, markets, and innovation and government assistance in arranging loans are positively associated with firm efficiency, and those private firms with weak access to and knowledge of financial, input, and product markets benefit most from such assistance. These patterns are robust across multiple estimation approaches. Our examination of the determinants of local government facilitation also suggests that it gravitates toward promoting efficiency, though there are also indications that rent-seeking may play a role. Our evidence is consistent with the notion that government facilitation can help some firms overcome market failures in the early stages of a country's private sector development. Though causality is difficult to establish, we argue that changing fiscal dynamics that forced local governments to become increasingly self-reliant in generating revenue, and a government promotion system based on local economic performance, were key motivating factors for market facilitation by local government officials.
•Local government assistance positively affected firm efficiency in China.•Firms with weak access to financial, input, and product markets benefited most.•Fiscal dynamics that made local governments self-reliant compelled these efforts.•Assistance helped firms overcome market failures in the early stages of development.
Using a large panel dataset of Chinese industrial firms, we find that poorly performing SOEs were more likely to redistribute credit to firms with less privileged access to loans via trade credit. ...While that could be consistent with the efficient redistribution of credit, it is more likely that these SOEs extended trade credit to prop up faltering customers that were in arrears. By contrast, profitable private domestic firms were more likely to extend trade credit than unprofitable ones. Trade credit likely provided a substitute for loans for these firms' customers that were shut out of formal credit markets. As biases in lending become less severe, the allocation of lending became more efficient, and the amount of trade credit extended by private firms declined. Our evidence implies that redistribution of bank loans via trade was not a major contributor to China's explosive growth.
This article examines the extent to which agency theory may explain chief executive officer (CEO) compensation in Chinese state‐owned enterprises during the 1980s. We find support for the agency ...theory: CEO pay sensitivity decreases with the variance of performance. Moreover, the performance sensitivity of CEO pay increases with the marginal return to executive action. While the elasticity of pay to sales is slightly smaller than that found for conventional firms in the West generally, our estimate of the semielasticity of pay with respect to profitability is comparable with estimates for regulated industries in the United States.
Using a sample of Chinese state-owned enterprises spanning 1980 to 1994, we investigate the factors that determine the sources of finance for firm-level fixed investment, including retained earnings, ...bank finance, and government transfers. Direct government transfers were not significantly associated with profitability throughout the period. In contrast, bank finance was positively linked to both profitability and some types of reform. Reforms that enabled managers to self-select, and thus expose themselves (and their employees) to greater risk, were positively associated with acquiring bank finance. The association between bank finance and profitability weakened in the 1990s as banks increasingly assumed bailout responsibility.
A key to understand the evolution of an economy is the property rights institution and the contracting institution that the government set up to shape the business environment of private firms. ...Focusing on China during its crucial two decades of transition (from the early 1990s to the early 2010s), this paper documents how the country's business environment and the characteristics of entrepreneurs evolved, along with the role played by local governments. Relying on multiple comprehensive data sets, the paper shows that many aspects of local business environments improved: infrastructure, development of the court system, and access to external finance. Meanwhile, the share of politically connected private firms remained large, and their advantage in accessing key resources increased. Under this dual-track private sector development, private firms became larger and more innovative and adopted more formal corporate governance mechanisms. Entrepreneurs became better educated, with more diverse sectoral experiences. Market competition increased over time, especially after China's World Trade Organization entry. The paper offers suggestive evidence that this dual track development had negative consequences, such as a lower tendency to innovate by politically connected firms.
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