Abstract
This paper proposes the new hypothesis that the loss of innovative efficiency is greater than the loss of productive efficiency in Chinese state-owned enterprises (SOEs). SOE reform in China has been able to achieve substantial improvements in SOE productive efficiency by using supervision and incentive mechanisms to establish adequate symmetry between residual rights of control and residual claims. However, these two dimensions of ownership rights – control rights and claim rights – remain relatively asymmetric in the realm of innovative efficiency; thus, SOE innovative efficiency remains impaired. This is because SOE managers have weak claims over the rents they create through innovation, due to the characteristics of risk, unpredictability and long durations of innovation projects. This paper confirms the theoretical hypothesis by conducting an empirical analysis of ownership-industry-year data for an important reform period in China.
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