Tigers are Bound and Monkeys are Free: A Comparative Study of State-Owned and Township/Village-Owned Enterprises in China* Xun Wang Douglass Heckathorn Introduction Profound social and economic reforms have taken place in China since 1978 (White, 1984; Welder, 1989; Prybyla, 1990; Dorn and Wang, 1990, Ge, 1990), including, as the center piece of the economic reforms, the reconstructionof industrial enterprises (Welder, 1989; Harding, 1987; Reynolds, 1987). However, the pace and results of enterprise reform have varied by type of ownership and managementsystem. For instance, township/village-ownedenterprises (TVEs) have been growing very rapidly since the early 1980s (Nee, 1992; Byrd and Lin, 1990; Wang, 1991). The average growth in total output of TVEs was 29.6 percent for the entire decade (People's Daily, July 28, 1992). In addition, the percentage of total national output produced by collectively-ownedenterprises, including enterprises in both urban and rural areas, increased from 21 percent in 1978 to 35 percent in 1992 (People's Daily, August 7, 1992). On the other hand, state-ownedenterprises (SOEs), especiallythe large and mid-size SOEs, have experienced severe difficulties in the past ten years. For instance, many studies reported that in 1992 only one-third of the large and mid-size SOEs was healthy, and another one-third was losing money (people's Daily, March 3, 1992; Nee, 1992; Peng, 1992; Ge, 1990; Byrd, 1992). In addition, the number of SOEs that depend on government subsidies is growing. One unofficial report estimated that the share of SOEs losing money already exceeded one third, or possibly as high as two thirds (Congress, 1991:444). Governmentopenly acknowledgedthat the total subsidiesto the SOEs equaled about one-half billion dollars a month in the first half of 1990 (Congress, 1991:442). No wonder one researcher

concluded that "After ten years of revitalization and restructuring, the urban state industrial sector is still beset by low efficiency and weakened vitality" (Peng, 1992:198). Why has the shape and fate of economic reform been so disparate across industrial enterprises? Why have collectively owned enterprises, especially TVEs, prospered while SOEs have declined. Can the differences be explained? The main purpose of this paper is to analyze governmental policy documentation end use a nation-wide survey to see whether there are different governmental regulations toward SOEs and TVEs which might affect the management systems adopted by the Chinese enterprises.

Literature Review Previous Studies on Enterprises Reform in China

Many studies investigated Chinese enterprise reform recently.

For instance, research

demonstrates the problems that enterprises suffered under the traditional economic structure and the rationale behind the reform (White 1984; Ge, 1990; Welder, 1989, 1994). In addition, there are studies on the process and progress of the reform (Lockett, 1983; Laaksonen, 1988; Jefferson and Xu, 1991; Byrd and Lin, 1990). Furthermore, many studies have examined how macro social-economical structure, especially the market mechanisms, affect enterprise reform (Tidrick and Chen, 1987; Byrd, 1991:3, Byrd and Lin, 1990; Lee, 1987; Reynolds, 1987; Nee, 1992). Examination of the existing literature on enterprise reform in China showed that most of studies have focused on economic reform in different economic sectors, and there was no systematic, comparative study of enterprises.

In addition, for understandable reasons, most Western researchers relied on

documentary analyses or case studies, not concrete indicators (Jefferson and Xu, 1991:46). So while there had been few empirical studies, the samples were either small or were limited to particular geographic regions (Nee, 1988; Jefferson and Xu, 1991; Reynolds, 1987). Furthermore, many of the studies were discipline-based and lacked of a general theoretical framework.

Therefore, I propose to conduct a comparative study of enterprise reform using both governmental documents and survey data.

I argue that organization theories in sociology and new institutional

economics can be combined to provide a useful framework to analyze the enterprises reform in China.

Theoreticalframework The interaction of organizations and environments has been one of the most important fields of sociological studies of organizations (Scott, 1987; Aldrich and Marsden, 1988; Hall, 1987). Within the literature on relationship between organizations and environments, institutionaltheory (Meyer and Rowan, 1977; Dimaggio and Powell, 1983; and Tolbert and Zucker, 1983) is particularly useful in examining how the institutional environment (or aspects of the environment, such as values, norms, and social conventions) bear upon organizational structure. The institutional theory tries to explain variations in organizational structure in terms of the structure's relationship with particular environmental conditions. In the tradition of organizational studies, my study will emphasize the importance of the environmental impact on organizations, especially on organizational structure, which in turn might influence organizational performance. However, my study will differ from those of institutionaltheorists in that I will emphasize governmental regulations as components of the institutionalenvironmentwhereas institutionalist theorists emphasize ideas, norms, and the culture. In addition, my study will broaden knowledge of the relationship between the environment and the organization in a socialist, centrally controlled society (China), an area that needs to be fully and systematically explored (Carroll et al., 1988; Ness, 1989; Ge, 1990). The new institutional economics has recently attracted many sociologists. Although sociologists respond to the new institutional economics differently, it is agreed that this perspective has made an important contributionto the study of organizational life (Ouchi, 1981; Granovetter, 1985; Perrow, 1986; Zald, 1987). Many scholars believe that this perspective can be profitably used to study contemporary

socialist societies, especially to analyze and understand their social institutions, organizational dynamics, newly emerging organizational forms, and market-oriented social transitions and transformations (Myers, 1987; Ge, 1990; Nee, 1990, 1992). According to institutionaleconomics, institutional arrangements and changes influence economic performance, and even social change and development. It is argued that one fundamental role of institutions in society is to determine the long-run performance of economies (North, 1981, 1990). Some scholars even argue that institutional arrangements can be used to explain the rise and decline of nations, and that societies that create the proper set of social institutions can survive and flourish and those that do not will falter and die (Schotter, 1981; Olson, 1982). By combining institutional economics with aspects of contract law and organization theory, Williamson (1991) argues that different types of contract law define and support different organizational forms. Under different conditions, organizational forms can reduce governance costs and hence improve efficiency. Williamson's message is that knowledge of contract law is critical to an understanding of the forms of organizations and their performance. In addition, the new institutionalist perspective has been used in response to market transitions in China. One researcher proposed a framework which he believes can be employed in analyzing recent state-induced institutional change in China (Myers, 1988:138). Myers suggests that the framework can be used to study changes in transaction costs, the emergence of new organizational forms, and behaviors that are likely to influence economic development. However, empirical studies guided by the framework are needed to test its applicability. Ge's study of Chinese state enterprises from the new institutionalistperspective correctly points out that the essence of the economic reform in China is to establish a new relation between state and economic enterprises (1990:2). However, he only studied SOEs. A comparative study of government policies toward variously organized industrial enterprises should yield better results to test the perspective.

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The most recent work of Victor Nee also applies the new institutionalistperspective in the study of how the institutionalenvironmentaffects organizational forms in the Chinese economic reform process. He suggests that the organizational form, rather than management system, affects performance. He writes: [p]arameter changes in the institutional environment affect the comparative costs of governance, resulting in change in the relative economic performance of the state, collective, and private sectors (1992:21). I argue that we should look at how changes in institutional environment affect the management systems of industrial enterprises, which might, in turn, affect performance. Further, empirical study is needed to verify his ideal-type study. Overall, my research extends these lines of analysis by arguing that: (1) the relationship between the environments and the organizations, especially the impact of the institutional environment on the organization, should be fully explored; (2) economic laws and regulatory policies toward industrial enterprises should be regarded as the institutional environment which will affect enterprise management systems, and (3) empirical studies are needed to explore how governmental policies affect enterprise management systems, which might, in turn, affect performance. By combining sociological theories of organization and the new institutional economics, the present study argues that changing institutional arrangements for industrial enterprises is the key factor in explaining the differences between SOEs and TVEs in the process of enterprise reform in China. Different enterprises behave differently and yield different outcomes because they operate in dissimilar institutional environments. The purpose of this study, then, is to explore how governmental policies as part of the institutional environment affect the management systems of industrial enterprises, which, in turn, might affect economic performance. In particular, the following questions are addressed: (1) Do governmental policies differ by industrial enterprises, namely, by ownership type7 (2) Do policies affect management systems in different enterprises; and specifically, (3) do enterprises have particular

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management systems in terms of their contractual, distributional, and power relationships with government?.

Methods This research consists of two tiers of data analysis. First, a group of governmental documents is examined in order to ascertain whether there are differences among policies. Previous research has indicated differences in governmental policies toward SOEs and TVEs (Byrd, 1990; Zweig, 1988). The aim of my analysis is to affirm these observations. Government policy documents used in the study, both in Chinese and in English, are collected from three different sources: (1) government publications, (2) academic journals, and (3) newspapers, The second tier of the data analysis is an analysis of a survey data set to ascertain whether management systems in industrial enterprises are different.

Data

The survey data set for my study was collected by Chinese colleagues from various research institutions and government agencies in a nationwide survey of 750 industrial enterprises in 1991:222 SOEs; 214 urban collectively-owned (COEs); and 268 TVEs. These enterprises were selected from 10 cities and 15 provinces from five economic regions and they were geographically representative as well as representative of three levels of economic development: advanced, relatively advanced, and backward. Information about management systems in ninety-eight industries and their economic performances was collected.

The enterprises in the sample were concentrated in thirteen major sectors: coal mining,

clothing, paper making, printing, plastic manufacturing, cement manufacturing, daily chemical goods manufacturing, daily electronic goods manufacturing, rubber manufacturing, and medical and pharmaceutical manufacturing.

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Survey questions about type of ownership, size, type of profit distribution, type of contractual system, type of decision-making power and so on were answered by the managers of selected enterprises. Information regarding economic performance was obtained from the accounting offices of the enterprises.

Dependent Variables The dependent variable for the study is the management system of enterprise. In this study the management system is measured along the following three dimensions: (1) the contract system which defines the contractual relationship between enterprises and government agencies; (2) profit distribution which defines distributional relations between government agencies and enterprises, and (3) the decisionmaking power managers have, for all important matters in the process of production -- such as making production plans, materials supplying, selling products, and labor allocation - all of which define the power relationship between the state and enterprises. In the following discussion, these three dimensions and measures are closely examined. Contractual Relationshin There are four major types of contract enterprises signed with governmental agencies: (1) The Share System; (2) The Contract Responsibility System~ (3) The Leasin2 Svstem: and (4) The Capital Assets Management Responsibility System. Under the Share System the assets of the enterprises are appraised to determine the shares of both the state and the enterprises. Therefore, the state has no direct control over enterprises (Ge, 1990). Under the Contract ResnonsibilitySystem, the government agencies and enterprises sign the contract which specifies the forms, duration, target, profit sharing, rewards and penalties. The aim is to establish a contractual relation between the government agencies and enterprises that would be compatible with the principles and producers of market economy. The ~

is popular among small, commercial, and industrial food enterprises. The

lessee pays the rent to government agencies according to the lease. Otherwise, the lessee fully controls

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the enterprises. The Capital Assets Manafement Responsibility System is a system in which government agencies choose the best bidder to manage the enterprise. The bidders are not only responsible for fulfilling profit targets, but are also responsible for increasing the total assets during the term. Among these types of contract, enterprises that adopt the Leasin2 System will have the most autonomy, followed by those that adopted the Share System. The enterprises adopting the Canital Assets Mananement ResnonsibUitv System have more autonomy than those that adopt the System.

Distributional Relationshiv In terms of profit distribution, there are four major arrangements. These are: (1) The Ouota profit/above Ouota Share Svstem (contract for quota profit and share above quota where above quota remittance rate is fixed based on negotiation). This is the system in which the enterprises and government agencies can negotiate to divide the profit above the quota. (2) The Qqota Profit System (contract for quota profit, retain everything above the quota). This system of profit distribution fixes the amount of profit (often 55%) that must be remitted to the state. The remaining profit is retained by the firm. (3) The Progressive Rate System (contract [or share] profits at a progressive rate). This is the system of profit distribution in which a firm contracts to increase its profit at a certain rate in exchange for retaining funds from additional work as welfare and bonus funds and as means of repaying bank loans. The progressive rate is fixed based on bargaining. (4) The Reduced or Shared Loss Svstem (contract for reduction of losses or sharing of losses). This is a measure that enables a money-losing enterprise to be subsidized by finance bureaus to insure that workers would be entitled to welfare and bonuses no less than those of workers in profit-making enterprises and that the enterprise would have at its disposal enough money to survive and expand.

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Power Relationshiv Before the reform, Chinese enterprises (especially SOEs) had little or no decision-making power over production, material supplies, final products sales, and personnel. All these matters were handled by the central or local government in an administrative way. Thus, the enterprises were not independent economic units, but administrative appendages of the government. During the course of reform, though, more and more enterprises gained significant decision-making power, and the situation varied across enterprises with different types of ownership. In order to distinguish among enterprises in terms of their decision-making power, many questions were asked.

Those questions can be grouped according to their effects on the process of

production, such as designing production plans, supplying materials, selling, and allocating labor. In terms of the decision-making power, with respect to the production plans, three questions were asked to find out who has the power to decide: (1) production plan; (2) investment and expansion; and (3) merging with other enterprises.

The managers were asked to answer if the supervisory body,

enterprise and supervisory body together, or the enterprise alone makes those decisions. Four question were asked to measure the level of decision-making power with the respect to materials purchasing. The managers were asked to determine whether there is 'no limit', 'somewhat of a limit' or a 'complete limit' on: (1) the price paid for purchasing the materials; (2) the quantity and quality of purchases; (3) the suppliers; and (4) procurement areas. In terms of how important the limitations placed on enterprises by the supervisory agencies in selling products, three specific questions were asked about: (1) pricing decisions; (2) seeking customers; and (3) seeking sales areas. Similarly, managers were asked to determine whether there is 'no limit', 'somewhat of a limit' or a 'complete limit' imposed by government over these matters.

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Four questions were asked to measure the decision-making power over human resources: (1), specifically, power over appointment of a new enterprise leader; (2) recruitment of new employees; (3) dismissal of employees; and (4) determining employees' wages. Again, managers were asked to answer if the supervisory body, enterprise and supervisory body together, or the enterprise alone makes those decisions. Since there are so many questions on decision-making power, and since they all are asked in the same manner, I constructed different scales to represent different powers. The higher the scores of the scales, the more power enterprises have.

Independent Variables The independent variable for the study is the type of ownership of enterprises. There are five different types of ownership in China: state, collective, joint-venture, foreign, and individual (Feuchtwang, 1983; James, 1989). Although data on SOEs, COEs, and TVEs were obtained in the survey, I only compared two major types of enterprises, SOEs and TVEs (since COEs are regarded as an extension of SOEs, and policies toward them are similar to those toward SOEs) 0..ockett, 1988:132). SOEs refer to enterprises owned by the whole people. In practice these are administered at levels down to the county or its equivalent in the urban areas. COEs are those in urban areas which are not formally owned by the whole people; in practice some COEs are administered in ways very similar to SOEs whereas other, usually smaller, COEs are administered by districts or neighborhoods within a municipality (Feuchtwang, 1983:227, James, 1989). TVEs are also collectively-owned enterprises, though they are different from those in the urban areas because they are less controlled by the government. The basic difference among those three types of enterprises is the control of the state. More specifically, state control can be seen in three dimensions: the contractual relationship between the state

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and the enterprises, the distribution relationship between the state and the enterprises, and the power relationship between the state and the enterprises. The state has the power to authorize or to encourage enterprises to adopt certain kinds of contracts. The state also has the power to decide how to distribute surplus produced by enterprises. More importantly, the state has the power to define the decision-making power enterprises could have over production plans, the purchasing of raw materials, price setting, control over employees, and investment and expansion of production capacity.

Hypothesis: The state has most control over the SOEs and is more likely to regulate them. As a consequence, managers of SOEs are more likely to be compelled to adopt economically nonrational types of contracts, pay more taxes and fees, and have less decision-making power over production plans, purchasing of raw materials, price setting, control over employees, investment/expansion of production capacity. On the other hand, the state has the least control over TVEs because they are on their own for setting up enterprises, finding market and materials, seeking investment.

Therefore, they tend to adopt more

favorable contracts, hand over less profit and have more decision-making power.

Results

Analysis of Government Policy By examining the reform process that SOEs and TVEs have gone through and relevant government policies1, we fred that there are some similarities between SOEs and TVEs. First, both the development of SOEs and TVEs were closely linked and influenced by state policies. Since China is a country with central planning and a strict control system, governmental policy has strong impact upon

1 Limited by the length of the paper, I have listed the important government policy documents toward industrial enterprises in the appendix. 17

the development of industrial enterprises (Ge, 1990; Du, 1990; Svejnar and Woo, 1990; Byrd and Lin, 1990; Griffin and Griffin, 1984). In the past, the growth of SOEs was faster than that of the TVEs, and the unsatisfactory situation in rural industry before 1978 was attributable to the traditional industrial strategy and policies (He, 1990:113). But now the growth of TVEs has outstripped that of both SOEs and COEs. This has resulted from the introduction and implementation of a new economic policy since the late 1970's and the early 1980s, which encouraged rural growth. Second, both SOEs and TVEs have encountered three major problems in terms of the relationship between the state and enterprises: namely, how to manage their distributional, power, and contractual relations with the state. Third, both have attracted government attention.

Reforming SOEs and TVEs have been

interrelated parts of the current reform. They both have gained more power and moved toward marketregulated economic environment. However, there were more significant differences between SOEs and TVEs. In general, there were fewer regulations for TVEs than for SOEs.

As mentioned before, hundreds of government

documents regulating SOEs have been issued since 1978. According to Li and Zhang (1991), from 1979 to May, 1991, the state government issued 245 important policy and legal documents regarding SOEs' reform. In contrast, fewer regulations regarding TVEs have been issued. This reflects the greater market orientation of rural enterprises. In addition, there were more regulations that restricted the development of SOEs. For instance, the state government issued The Circular Concerninf the Implementation of the Bonus and Piece-rate Wa~e System (1979) which imposed bonus control in SOEs. The state government also issued the Trial Methods of Piece-rate Waue in State-owned Enterorises which required all SOEs to adopt piece-rate systems only if they met certain requirements set by government agencies. In addition, they had to

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present their proposals to the supervisory agencies and local labor bureaus before adopting piece-rate wages. On the other hand, there was no such regulation at all for TVEs. Most TVEs adopted piece-rate wage and bonus system much earlier. In some areas, government agencies had no control over TVEs' wage systems at all. Furthermore, although TVEs and SOEs encountered the same problem in dealing with contractual, distributional, and power relations with the state, the processes they have gone through are different. For SOEs, it seems that minor changes occurred first, and then serious changes occurred later. First, the state government tried to stimulate enterprises by changing the distributional relationship between the state and enterprises by providing financial incentives for the enterprises. Then the program aimed at changing the power relation was introduced. Finally, the government tried to push enterprises to totally reform their organizations by adopting the contract responsibility system (Ge, 1990; Byrd, 1992).

On the other hand, TVEs have gone through a different path.

The following section will

discuses the differences between SOEs and TVEs in terms of their contractual, power and distributional relations with the state.

Contractual Relationships PINEs adopted the contract system much earlier than SOEs since the rural responsibility system was introduced in late 1970's and early 1980"s. As early as in 1980, in the Communiaue on Several Issues Concernin~ the Further StrenL~d~enin~ and Perfection of Production Resvonsibilitv Svstems in Agriculture, the contract responsibility system was formally recognized as the main form of economic organization in rural areas by the Chinese Communist Party. Since then, all rural economic organizations in general, and TVEs in particular, were encouraged to adopt the contract responsibility system.

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Under the contract responsibility system, all enterprises are contracted to managers, directors, workshops, production groups, or to the entire staff. The managers can adopt flexible management methods which in turn enhance their performance (Beijing Review, 1984). Establishing the contractual relationship between state and other governmental agencies and rural economic organization has been very important because the system presumably would provide TVEs with more financial incentives and decision-making power. These have been the principle policies for rural economic development, including both farming and industry. On the other hand, SOEs did not adopt the contract responsibility system on a large scale until 1986. In fact, the contractual relationship between the state and SOEs still has not been well established. This is why SOEs are still sluggish.

They have excessive tax burdens, frequent administrative

interference and lack of decision-making powers stipulated in the numerous policy documents including the Enterorises Law promulgated in 1988 (Jin, 1991).

Distributional Relationshit) Prior to 1978, the relationship between the state and enterprises with regard to surplus distribution was highly centralized. Besides paying industrial and commercial taxes, enterprises needed to hand over all profits to government agencies, while the capital for reproduction and other purposes was allocated by the state. Losses incurred by enterprises were covered by the state (Byrd and Lin ,1990; Ge, 1990; Lee, 1987). The situation has changed for both SOEs and TVEs aider more than a decade of reform. Both have gained more power in the course of reform. However, as many researchers have observed, the state government created preferential conditions for TVEs' development (Beijing Review, 1988; He, 1990; Byrd and Lin, 1990 Wong, 1988). First, the state offered TVEs more favorable tax rates and provisions for tax reductions or exemptions (He, 1990, Wong, 1988). As discussed previously, back in 1979, the Trial Re2ulatiQ~ of Tow~hin and Village-

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Owned Enterprise already offered tax exemptions to less profitable TVEs. In addition, the regulation stipulated that new TVEs could operate tax-free for 2-3 years if they were in financial difficulties and for five years in frontier counties or national autonomous areas. Furthermore, TVEs in underdeveloped areas could even be exempted from paying agricultural tax. After 1984, more tax breaks were extended to rural areas which caused TVEs to mushroom (He, 1990). One case study found that in 1985 rural industrial enterprises in Wuxi county were supposed to pay Y210.9 million in taxes to government - Y143.4 million in indirect taxes and Y67.5 million in profit taxes. However, they received a Y57.3 million reduction and exemption from indirect taxes, and a Y19.6 million reduction and exemption from profit taxes. (Wang, 1990:230). National statistics revealed a similar pattern. For instance, according to Byrd and Lin (1990), although TVEs paid Y14 billion in taxes (including profit taxes and indirect taxes) to the government in 1985, this amount only constituted 7.7 percent of the total national budgetary revenue. This is largely because SOEs were more heavily taxed than TVEs (Byrd and Lin, 1990:15). Some scholars argue that tax payments by TVEs have been and will be rising sharply in the future after tax exemption expire; however, favorable tax policies toward TVEs remain common (Byrd and Lin, 1990; Beijing Review, 1988). TVEs not only have enjoyed favorable tax policies, but also retained a greater percentage of the profits. According to one case study, among thirty-six sample TVEs in one county, profits handed over to community governments only constituted two to five percent of the net profits of those enterprises in the past several years. "Even when management fees are taken into account, the figure is only about 20 percent of total net profits, which leaves large amounts for reinvestment" (Wang, 1990:230). Furthermore, TVEs have been supplied with large amounts of funds by the government. After the issuance of the Central Committee Circular on Aaricnltural Work in 1984, large amounts of credits and bank loans from both central and local government were given to TVEs, to speed up their

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development. National statistics showed that the loans from rural credit union to TVF.s increased 225 percent from 1983 to 1984. And the loans in 1984 were almost ten times that in 1979. Many researchers have observed the same pattern at the provincial and county level, namely that TVEs were supplied with an ample and cheap supply of bank credit, which to a great extent helped the rapid development of TVEs after 1984 (Wang, 1990; Du, 1990). On the other hand, SOEs are still the main sources of the state revenue, even though they have experienced slow development. Although SOEs, especially the 11,000 large and medium-sized SOEs only comprise 2.5 percent of the nation's total number of enterprises, their industrial output value makes up 45 percent of China's total. The profits and taxes they hand over to the state are still well above 60 percent for the nation, thus serving as the main source of the state's financial revenue (Jin, 1991). This is largely because SOEs have had a heavy tax burden in comparison to TVEs. The tax rates for SOEs and TVEs are different and the gap is significant. For instance, the tax rate for large and medium SOEs is 65-70 percent (White, 1993). No wonder people say, "The larger the enterprises the greater the state take". In addition to paying more taxes, SOEs have retained a smaller percentage of their profits in comparison to TVEs. According a very recent study, in mid-1985, larger SOEs delivered 80-90 percent of their profits, some SOEs and most COEs delivered 50 percent of their profits, whereas TVEs delivered only 30 percent of their profits to the state (White, 1993:126). Beijing, Tianjin, and Shanghai confirmed that estimate.

A 1990 survey of 193 key SOEs in

The survey showed that 81.6 percent of

enterprises' net income was turned over to the state in the form of taxes, fees (such as for energy and transport), loan interest, and state treasury bonds. Another 10.2 percent was used to repay special loans and only 8.2 percent was retained by the enterprises, a 26.2 percent drop from the 1986 level of retained profits (Beijing Review, 1988).

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Power Relationshivs In terms of the power relationship between the state and enterprises, TVEs and SOEs are different. First of all, since TVEs' production plans were not covered by the state economic and social development plan, they could produce whatever they wanted and whatever was marketable. In addition, since the government agencies still controlled SOEs and COEs, TVEs could expand into market vacuums created by the limitations of SOEs and COEs. Similarly, T V ~ could adopt flexible management methods which in torn boosted their performance. By comparing a local state-owned textile factory and other township/village-owned textile factories, economist Xue (1985) illustrated the difference between SOEs and TVEs in terms of their decision-making power over production. Xue observed that the state-owned mill could not compete with other TVE mills despite its strong technical personnel and better equipment since it was designated by the state to produce only one particular type of cloth under the state plan. On the other hand, many TVEs were able to adjust and readjust their production according to market demands. The situation has not changed much despite more than a decade of reform, and SOEs' production is still tightly controlled by the state and its agencies. For instance, according to the promulgated in 1988, the first major responsibility for $OEs still is fulfilling the state's mandatory planning quotas, while ensuring product and service quality (National People's Congress, 1988). One researcher found that "In 1989, the proportion of products manufactured in line with the state's mandatory plan dropped to 17 percent of all produced. The existing mandatory planning, however, is mostly applied to key state enterprises" (Jin, 1991). $OEs not only have less power over what to produce, but also less power to decide when to exit. For instance, the Entervrises Bankrut~tcy Law has been in existence since 1988, but very few $OEs went bankrupt even though they suffered substantial losses. According to an article appearing on Beiiin2

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Review in 1991, no SOEs had ever gone broke at that time since the promulgation of the law (Beijing Review, 1991). Conversely, in 1989-90, more than 600,000 township enterprises (3 percent of the total) went bankrupt (Jin, 1991). In addition to control over the production plan, the state exercises strict control over the supply of materials and the prices of products, leaving little discretion to each SOE. For instance, the price of many products produced by SOEs is still under the control of state pricing agencies and local authorities. On the other hand, only about 70 percent of raw and semi-finished materials that SOEs need is guaranteed by the government now. The remaining 30 percent is provided by purchasing at negotiated, frequently high prices, which increase production costs (Jin, 1991). Therefore SOEs suffer double burdens. On the other hand, since TVEs have no access to state supply and sale channels, they have operated in a largely market-oriented

environment, buying raw materials according to their needs,

selecting customers freely, and independently setting product prices (Beijing Review, 1988). More importantly, because TVEs lacked fixed channels of marketing, they have developed many strategies and dedicated substantially more resources to marketing than SOEs (Du, 1990; Beijing Review, 1988, Ody, 1992).

For instance, TVEs usually pay large bonuses and commissions to purchasing and sales

personnel. In addition, they mobilize all the employees to obtain suppliers and to promote sales. Finally, they use agricultural and sideline products for exchanging raw materials and selling products (Du, 1990:55).

SOEs can not adopt the same strategies due to the tight state control.

TVEs also have operated in a more complete market environment than have SOEs in terms of their control over personnel. TVEs are much less controlled by state plans, thus enjoying greater access to the labor market than SOEs (Wu, Wang, and Xu, 1990; Peng, 1992, Byrd and Lin, 1990; Beijing Review, 1988; Meng, 1990; Wong, 1988). Some scholars even argue that the low labor costs and high labor motivation and effort have been principle sources of TVEs' success in competing with SOEs (Bryd and Lin, 1990:275).

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More specifically, first, TVEs have enjoyed a large number of low-wage surplus laborers from the agricultural sector (Meng, 1990:277). Adopting the household responsibility system and reducing the large scale irrigation projects since 1979 made past hidden surplus labor problems visible and serious. It is estimated that about one third of the labor force in agriculture is surplus. Based on this ratio, there were about 130 million surplus laborers in rural China in 1988. This has provided TVEs with a large number of low-wage surplus laborers. Second, the methods of recruiting and dismissing workers have been flexible for TVEs. According to a World Bank sponsored survey, direct hiring constituted the most important form of recruitment. Only one out of four counties surveyed had a majority of jobs assigned by township/village government. Government-assigned job rates for the other three groups of counties were 44 percent, 38 percent and 16 percent, respectively (Meng, 1990:304). Third, the laborers have been relatively free to move within rural areas after the issuance of the three major policy documents in 1982, 1983, and 1984. Although many employees of TVEs still come from the same locality, in some advanced areas, more and more employees are coming from outside the region. In addition, TVEs have had more control over employees' wages and bonuses than have SOEs. Many researchers reported that wages and bonuses are closely related to individual and enterprises performance in TVEs than they are in SOEs (Byrd and Lin, 1990; Song, 1990; Beijing Review, 1988). In some areas, government agencies had no control over wage in TVEs. For instance, one study reported that in one of four surveyed counties, local government had basically no control over wages in TVEs. Each enterprise decided its wage simply based on the labor supply and demand on the market (Wu, Wang and Xu, 1990:329).

On the other hand, the principle of more pay for more work has not been

implemented in SOEs due to unified state control of wage increases (Yao, 1991). The bonus used to stimulate motivation was capped in SOEs; this lowered the morale of employees.

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Furthermore, SOEs tended to have fixed wage systems while TVEs have adopted various types of piece-rates wage (Byrd and Lin, 1990). One study reported that less than 10 percent of sample TVEs workers were paid by the hour, and the rest were subject to some form of piece-rate payment. On the other hand, more than half of the surveyed SOEs had a fixed salary system and only slightly more than five percent of SOEs had adopted a piece-rate wage system (Song, 1990:406). This has resulted in a real wage difference between SOEs and TVEs. According to the same study mentioned above (Song, 1990), TVEs workers' wages were 10 percent higher than those of SOEs workers. The yearly wage for TVEs workers was Y1,434, while the yearly wage for SOEs was Y1302. Officially estimated wage differences were even higher. According to government officials in one of four surveyed counties, SOEs workers earned 20 percent less than their counterparts in TVEs. It is believed that the gap may well reflect the different wage systems adopted by different enterprises (Song,

1990:406). Moreover, likeprivate and foreign joint-ventureenterprises,TV~ have had the right to fire unqualified employees while SOEs have not been able to dismiss redundant workers unless they were found guilty of violating the law, even though newly promulgated ~

stipulated that

enterprises have the right to dismiss employees according to the state regulations. One extreme case was reported in Beiiin~ Review in 1991: an enterprise spent more than two months trying to get approval to fire a worker who disobeyed his assignment. Eventually, the enterprise had to reassign the worker under government pressure (Yao, 1991). Overall, the results of analyzing policy documents support the hypothesis that there are different governmental policies toward SOEs and TVEs in the course of enterprise reform. In general, TVEs, in comparison to SOEs, have enjoyed more favorable policies and operated in a more favorable institutional environment.

26

Analysis of Survey Data Previous studies (Lee, 1987; Ge, 1990; Nee, 1992; Myer, 1987) have examined how governmental policies affect the process and the progress of enterprise reform using limited empirical data. The availability of the nationwide survey data on industrial enterprises across regions, types of ownership, and management systems makes it possible to use concrete indicators to investigate the many ways in which government policies affect enterprises. The results of this study should yield more reliable conclusions and generalizations than has been possible in the past. The following section reports how government policies affect the management system of enterprises measured in three dimensions.

Contractual relationshin The results of crosstabulation of ownership type and the type of contract are presented in Table 1. From the table, we can see that in 1990, among 221 SOEs, only 1 SOE adopted the Leasin~ System which is the most favorable type of contract. On the other hand, most of SOEs (86 percent) adopted the Contract Resvonsibilitv System which is the least favorable type of contract.

No SOEs in the sample

adopted the Share System which is the second most favorable type of contract. Like SOEs, very few TVEs (two enterprises) adopted the most favorable type of contract, the Leasin~ System. Most of TVEs (71.5 percent) adopted the least favorable contract system, the Contract Resvonsibilitv System. However, the percentage is significantly lower than that of SOEs. In addition, TVEs were more likely to adopt the Cavital Assets Management Resvonsibilitv System. Among the 263 enterprises which answered the question, 69 (26.2 percent), reported that they had adopted this system, and the percentage is much higher than the percentage of SOEs. Finally, among the eight enterprises that adopted the Share System. one half were TVEs.

27

Table 1: Types of Contract by Ownership T w e of Ownershin

soE

toe

TV~

Other

1 0.5

8 3.8

0 0.0

Canital Assets Manageni~n~ System

9 4.1

16 7.6

Contract Resnonsibilitv Svstem

190 86.0 21 9.5

147 69.7 37 17.5

188 71.5 0 0.0

13 65.0 1 5.0

221 100.0

211 I00.0

263 100,0

20 100.0

Share System

T,uves of Contract ~vi'~t) (%) Total

2 0.8

0 0.0

3

4

1.4

1.5

1 5.0

69 26.2

5 25.0

Gamma -.48081 T -9.22690

Overall, we found that surveyed enterprises, regardless of their ownership, were more likely to adopt the Contract Responsibility_System, followed by the Canital Assets Mana2ement Resvonsibilitv ~ystem. Among the enterprises that provided information about their contractual relationship with the state, 89 percent reported that they had adopted these two systems. On the other hand, the Share System is the least popular contract system adopted by the enterprises, followed by the Leasin2 System. Only 19 enterprises (2.6 percent) adopted these two systems. Second, in comparison to TVEs, SOEs are more likely to adopt the Contract Resvonsibilitv System. which is the least favorable type of contract. On the other hand, even though the Contract Resvonsibilitv System seems to be taken as a formalized system, about 30 percent of TVEs have adopted three other types of contract systems. For instance, among 99 enterprises that adopted the Cavital Assets Management ResnonsibiliW System, about 70 percent were TVEs. In addition, among the enterprises that adopted the Share System, half were TVEs. 28

The measure of association shows that there is a significant negative relationship between the types of ownership and the types of contract enterprises adopted.

This means that enterprises with

different ownerships tend to have different kinds contractual relationships with the state and other levels of governmental agencies.

In this case, TVEs are more likely to adopt more favorable types of

contracts in comparison to SeEs. Therefore, the result supports our hypothesis that the stronger the state control over enterprises, the less favorable is the contract system adopted by the enterprises.

Distributional relationshio The results of crosstabulating profit distribution by type of ownership are presented in Table 2. According to the table, among 222 SeEs, only 31 SeEs (14 percent) adopted the Ouota Profit System. This is the most favorable types of profit distribution, since, under this distributional system enterprises can obtain all profits above predetermined quota. Another 10.4 percent of SeEs adopted the Proeressive Rate System. This is the second most favorable type of profit distribution, since the enterprises can share the profit above quota according to a predetermined progressive rate. On the other hand, 10.4 percent of SeEs adopted the least favorable type of profit distribution, the Reduced or Shared Loss System. Most of the enterprises that adopted this types of profit distribution were money-losing enterprises and had no profit to share at all. In addition, one third of SeEs (74 cases) adopted the second least favorable type of profit distribution, the Ouota Profit/above Ouota Share System. Under this system, enterprises had to negotiate with governmental agencies on how to divide the profits about predetermined quota. On the contrary, 20 percent of TVEs adopted the most favorable type of profit distribution, the Ouota Profit System. Second, 8.9 percent of TVEs adopted the second most favorable type of profit distribution, the Proeressive Rate System. On the other hand, only a few TVEs adopted the Reduced or Shared Loss System (1.6 percent). Finally, it seemed that TVEs were more likely to adopt the Ouota

29

Profit/above Ouota Share System since half of the TVEs (46.5 percent) in the sample adopted this type of profit distribution.

Table 2. Types of Profit Distribution by Ownership

Types of Profit Distribution (Count) (~)

Types of Ownership

SOE

COE

TVEs

Other

The Ouota Profit

31 14.0

26 12.3

52 20.2

5 23.8

Protressive Rate

23 10.4

54 25.5

23 8.9

3 14.3

Ouota Profit/Share above

74 33.3

36 17.0

120 46.5

6 28.6

~[ggg0L.~kr~d~

23 10.4

8 3.8

4 1.6

1 4.8

Other

71 32.0

88 41.5

59 22.9

6 28.6

Total

222 100.0

212 100.0

258 100.0

21 100.0

Gamma -.12665 T -3.02409 By comparing types of profit distribution adopted by different enterprises, especially SOEs and TVEs, I find that first, there were more TVEs than SOEs that adopted the most favorable type of profit distribution, the Ouota Profit System. The percentage of TVEs that adopted this type of profit distribution was 20.2 percent while the percentage for SOEs was 14.0. Second, a large percentage of SOEs adopted contracts for the Reduced and Shared Loss System (10.4 percent) which is the least favorable type among those four major types of profit distribution. Among36 enterprises adopting this system, 63.9 percent of them were SOEs. On the other hand, very few TVEs adopted this type of profit distribution. 30

The negative gamma reveals that the type of ownership is negatively related to the type of profit distribution. The relationship is significant although not very strong. Overall, the results support our hypothesis that SOEs tend to adopt less favorable types of profit distribution, while TVEs are most likely to adopt more favorable profit distribution.

Power relationshin As discussed previously, I have grouped all the questions on decision-making power into four categories: (1) power over production; (2) power over purchasing; (3) power over sale; and (4) power over human resources (labor). Since all these questions were asked in the same manner, I constructed four different scales to represent four different types of power. The highest scores for power over production and sale are nine, while the highest scores for power over purchasing and human resources are 12. The higher the score of those scales, the more power enterprises have. The results are presented in table 3. Table 3. Decision-Making Power by Ownership Ownership mean (Std Dev)

Decision-Making Power Production

Sale

Purchasin~

Labor

SOE

5.2690 (1.3864)

7.4054 (1.4006)

10.8909 (1.6790)

7.7067 (1.7097)

COE

5.8263 (1.4314)

8,2679 (0.9583)

11.3447 (1.2964)

8.1269 (1.8096)

TVEs

6.0506 (1.4898)

8.2836 (1.3302)

11.3470 (1.6131)

9.5135 (1.6267)

Other

6.3000 (1.9494)

8.1818 (1.4683)

10.8636 (2.0070)

9.8095 (2.0410)

31

From the table, we find that SOEs have an average score of 5.2690 on decision-making power over production while TVEs have an average score of 6.0506. In terms of decision-making power over sale of final products, the data show the same pattern, namely that TVEs have higher scoring than SOEs. In addition, TVEs have a slightly higher mean than SOEs for the decision-making power over purchasing. Finally, in terms of decision-making power over human resources, TVEs's score is much higher than that of SOEs. Apparently, TVEs have more power than SOEs in all four categories. The analysis of variance further indicates that those differences are significant at a level of .05 or higher. By analyzing a nation-wide survey on enterprise reform, I have confirmed that different enterprises have established different contractual, distributional and power relationships with the state government. TVEs have established more favorable relationships while SOEs have established less favorable relationships with the state.

Conclusion Economic reform was the major component of the social change in China in the 1980s. This affords a singular opportunity to study the process of transformation from a centralized, planned economy to a market-oriented economy, and to study social transformation in general. Little research on these facets of Chinese society has been carried out by sociologists, yet it is the sociologists' responsibility to study social change and to pioneer social reform (Wang, 1985). This study combines economics, sociology, management, and political science to inquire into how governmental policies, acting as the institutional environment, affect internal management systems, which in turn, might affect economic performance.

This work is a part of an effort to develop an

interdisciplinary social theory of organizations (Williamson, 1991; Heckathorn and Maser, 1987). It is also a part of recent efforts to develop a theory that tries to link micro- and macrosociology by combining economics and sociology CLindenburg, 1990; Coleman, 1990; Friedman and Hechter, 1990).

32

Overall, I find that, under the current governmental policies, SOEs have occupied an unequal, inferior position in market competition, thus impeding their advance durin8 the past decade. This is in sharp contrast with TVEs (and other enterprises, like private or foreign-venture enterprises) which can pursue faster development because they are much freer from the control and the influence of government policies and regulations. The result, as people often comment in China, is that the "tigers are bound and the monkeys are free'. In my judgement, this is the main reason why TVEs have experienced rapid development, while SOEs have languished.

* I would like to thank, Seymour Warkov, Charles Logan and Wayne Villemez for their valuable comments on earlier drafts.

An earlier version of this article was presented at the International

Conference of "China at the Turn of the Century: Issues, Challenges, and Agendas" in Hawaii in 1994. The research in this article has been supported by the dissertation fellowship and faculty travel fund from the University of Connecticut. I also would like to thank Anna Maria Williams and Gene Shackman for their comments and help.

Correspondence

may be sent to Xun Wang, Department of

Sociology/Anthropology, University of Wisconsin-Parkside, Kenosha, WI 53141.

33

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Appendix Ministry of Finance, People's Republic of China. 1980. Provisional Regulations of the State Capital Construction: on Problems Related to the Broadening of the Management Decision-Making Power of Construction Enterprise. People' Congress of the People's Republic of China. 1982. Economic Contract Law of the People's Republic of China. .

The Bankruptcy Law of the People's Republic of China on State-Owned Enterprises.

State Administration of Supplies, People's Republic of China. 1980. Provisional Regulations of the State Capital Construction: on Problems Related to the Broadening of the Management Decision-Making Power of Construction Enterprise. State Bureau of Labour, People's Republic of China9 1980. Provisional Regulations of the State Capital Construction: on Problems Related to the Broadening of the Management Decision-Making Power of Construction Enterprise. State Commission for Restructuring the Economic System. 1982. Report on Some Questions Concerning the Improvement of the Industrial Economic Responsibility System. State Council, People's Republic of China. 1978a. Circular Concerning the Implementation of the Bonus and Piece-Rate Wages. .

1978b. Decisions of the Central Committee of the Communist Party of China on Some Questions Concerning the Acceleration of Industrial Development (Draft) 9 1979a. To Change from Feudalistic-bureaucratic Style of Management. 9 1979b. Several Rulings Concerning the Expansion of Managerial and Marketing Autonomy in Stato-Ownod Industrial Enterprises.

.

1979c. The Regulation of Profit Retention in State-Owned Enterprises.

.1979d.

The Provisional Regulation of a Fixed-Asset Tax in State-Owned Enterprises.

.1979e. The Regulation of an Increase in the Depreciation Rate and an Improvement in the Use of Depreciation Fees in State-Owned enterprises. 9 1980a. The Provisional Measure of Profit Retention in State-Owned Industrial Enterprises. 9

1980b. Tentative Measures Concerning the Sharing of Profits in State-Owned Industrial Enterprises.

39

.

1980c. Provisional Regulations Concerning the Promotion of Economic Combination.

.1980d. Report Concerning the Work Situation and the View for the Future of the Pilot Schemes of the Expansion of Autonomy in Enterprises. .

1981a. Interim Regulationson Staff and Workers' Congresses of State Industrial Enterprises.

.1981b. Summary of Briefing of the Forum on InstitutionalReform in Industrial Management. .1981c. Provisional Measure Concerning the Thorough Implementationof Papers of Expansion of Enterprise Autonomy, and Consolidationand Improvementof the Task in expansion of Enterprise Autonomy. .

1981d. Opinion on Several Problems of the Industrial-productionEconomic Responsibility System9

.1982a. Factories. .

The Provisional Regulationof the Task of Factory Directors in State-owned

1982b. The Regulationof Awards and Punishmentsfor Staff and Workers in Enterprises.

.1982c. Several Problems Concerning the Improvement of the Current Industrial Economic ResponsibilitySystem. .1982d. Provisions of the Ministry of Finance on Handling Financial Questions in the Supervision of Enterprise Financial Affairs. .

1982e. Report of the Ministry of Finance on Improving Financial Work in StateOwned Enterprises. 9 1982f. The Report of the State Economic CommissionConcerning the National Meeting on Enterprise Consolidation. 9 19828. Decision of the Central Committee of the Communist Party of China and the State Council on ComprehensiveConsolidationof State-Owned Industrial Enterprises.

.1983a.

Interim Regulations on State-OwnedIndustrial Enterprises.

9 1983b. Provisional Regulationsof the Ministry of Financial Concerning the Collection of Income Tax From State-Owned Enterprises. 9 1983c. Trial Methods of the Ministry of Finance Concerning the Substitutionof Profit Delivery for Tax Payment in State-OwnedEnterprises. 40

9 1984a. The Regulation on Cost Management in State-Owned Enterprises. .

1984b. "Certain Regulations Governing Individual Industry and Commerce in Rural Areas." February 27, 1984. In Foreign Broadcast Information Service March 13.

.

1984c. The Provisional Measure Concerning the Trial Implementation of the Second Step of the Substitution of Taxation for Profit Remittance in State-Owned Enterprises

.

1986. Provisions of the State Economic Commission, State Science and Technology Commission, Ministry of Finance, and Patent Office of the PRC on Strengthening the Patent Work of Enterprises. 9 1987a. Provisions of the State Council Regarding the Entry of Scientific Research and Design Organizations into Large and Medium-Size Industrial Enterprises. 9 1987"o. Interim Regulations of the Administration of Bonds of Enterprises.

.

1987c. Reply of the Supreme People's Court on the Liability toward Debts at the Closure of an Enterprise Operated by an Administrative Unit or an Enterprise Unit. 9 1988a. Provisional Regulations on the Contracted Operation Responsibility System for Industrial Enterprise Owned by The Whole-People.

.1988b. Overall Plan of the State System Reform Commission Concerning the Deepening of Economic Reform in 1988. .

1988c. Law of the PRC on Industrial Enterprises Owned by the Whole People.

.

1988d. Provisional Regulations Prohibiting the Solicitation of Funds from Enterprises.

.

19880. Provisional Regulations on the Leasing and Operation of Small Industrial Enterprises Owned by the Whole People.

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41