Corporate Pyramids and SOE Innovations

Abstract

Why do some state-owned enterprises (SOEs) embrace innovations during economic transitions, when institutional logics move from state socialism to market capitalism? The rise of a market capitalism logic espousing competition and innovations challenges traditional SOEs’ state socialism logic that prioritizes central planning. We posit that these challenges, stemming from the grip of the state as the ultimate owner, may be mitigated for some SOEs in corporate pyramids. A pyramid features SOEs being organized into chains of firms, creating indirect ownership and control through pyramidal layers. Such layers insulate government intervention in lower-tier SOEs, loosening the grip of the state socialism logic and facilitating the transition towards the market capitalism logic, as reflected in more SOE innovations. Leveraging a sample of SOEs in China, we find that SOEs innovate more when the number of pyramidal layers between them and the state increases. Additionally, the innovation-facilitating role of pyramids hinges on industry regulations and institutional development. Overall, this paper integrates research on institutional logics and corporate pyramids to deepen our understanding of SOE innovations.