Achieving stability and prosperity: The Chinese way

State governance in corporations controls the economy and employment to develop prosperity in China. Does privatization achieve both objectives? Privatization theory views that giving up state control benefits firms economically but is quite silent on the value of employment benefits. However, market mix theory (Sappington and Stiglitz, J Policy Anal Manag 6(4):567–582, 1987; Stiglitz, Whither Socialism? MIT Press, Cambridge, MA, and London, England, 1994) views that state control of firms to provide employment is valuable. It further implies that corporate performance and employment objectives can co-exist well together. We formalize Market Mix Theory to reveal its testable implications on dual objectives and performance. We test the notion that Chinese corporations pursue two objectives: maximizing economic value and employment, unlike the singular objective of value maximization in Western firms. As well, we test the benefit of partial privatization. First, we test the market mix theory by studying the relationship between state ownership and employment and financial performance as a combined objective. We show that mixed firms have the highest performance in wealth maximization and employment compared to private and state-controlled firms. Second, we examine Chinese SOEs’ Employment with a large sample of 2536 public firms using panel regressions. We find that state ownership and firm employment have a positive relationship. State ownership is positively related to employment stability. Moreover, performance has a negative relationship with state ownership-employment. This result supports our over-employment hypothesis, meaning that economic performance is sacrificed to provide employment. Lastly, we show executive pay for SOE managers is positively related to employment. The employment objective is real in determining state control in Chinese corporations without conflicting to maximize shareholder wealth. Rather, the mixed form of ownership is optimal and vitally contributes overall to the stability and prosperity of China. Our formalization of market mix theory better reflects the reality of motivation, performance and benefits of partial privatization as exemplified in Chinese state-owned enterprises.

Quan Cheng, Alex Ng