Firm dynamics and industrialization in the chinese economy in transition: Implications for small business policy

Abstract

This article first presents a review of the development of different types of domestic enterprises: state-owned enterprise (SOEs), collectiveowned enterprises (COEs), and other enterprises (OEs), which include mainly private enterprises. Compared with other transition economies, COEs are actually an important source of China's rapid economic growth. They are “vaguely defined cooperativeŝ without a well-defined ownership structure. There is no equivalent organizational structure similar to COEs in Western economies. The purpose of this article is to study the empirical relationship between the size of domestic enterprises including state-owned enterprises, collective-owned enterprises, and other enterprises and their firm dynamics (growth) by investigating whether they grow according to Gibrat's Law. The majority of COEs and OEs were formed after the economic reform. The rapid growth of these non-state enterprises, especially COEs, is actually the driving force behind the rapid development of the industrial sector. Our empirical results suggest that Gibrat's Law does not hold for all types of enterprises (the rejection is especially strong for COEs). Moreover, small enterprises are growing faster than their larger counterparts in terms of employment and output. This conclusion leads to (at least) three implications: (1) There has been little research into the dynamics of SOEs and COEs in an economy in transition. Our results not only help stimulate further research in this area but also provide information for designing policies to speed up the economic reforms. (2) Until now, the Chinese government has not had a comprehensive small business policy. Given our empirical results, there is an implication for government policy prescription. To achieve China's development targets of rapid industrialization and lower unemployment or underemployment, the Chinese economy can reap more dynamic benefits by breaking up a giant and inefficient enterprise (especially inefficient SOE) into a number of smaller enterprises. In addition, more small enterprises also improve competition in the marketplace and force other inefficient SOEs to improve their performance. Further research should be undertaken to examine the viability of this policy. (3) Because COEs are the majority of small manufacturing enterprises, the rapid growth of COEs (after their formation) that are simply the opposite of the type of private organizations, the center of the Central and East European reforms, is rather surprising to academics. Although some hypotheses like “cooperative culturê and “moral framework for rights are put forward to explain their superior performance, the validity of such hypotheses has not been empirically tested yet. This is a fruitful area for further research.