Achieving stability and prosperity: The Chinese way

The study investigates whether Chinese state-owned enterprises (SOEs) pursue dual objectives—maximizing economic value and providing employment—and how different degrees of privatization affect these objectives. Motivated by China’s robust economic performance and the prevalence of SOEs among global large firms, the paper challenges the dominant privatization view that state control harms efficiency. Drawing on market mix theory, it posits that state ownership can deliver social value (employment) while still achieving competitive economic outcomes, particularly under partial privatization. The research asks: (1) Do Chinese SOEs explicitly pursue employment as a firm objective alongside shareholder value? (2) Does partial (mixed) ownership optimally balance economic and employment outcomes? (3) Do central versus local government property rights differentially influence financial and employment performance? The study’s importance lies in integrating social objectives into corporate governance of SOEs, reassessing privatization outcomes, and informing policy on mixed-ownership reforms.

Prior work (Marcelin and Mathur, 2015) finds that complete privatization generally improves performance, yet outcomes depend on institutional quality and property rights. Evidence from India (Gupta, 2005) and China (Huang and Wang, 2011) indicates benefits from partial privatization; some studies show non-linear (concave or convex) relationships between state ownership and performance (Qi et al., 2000; Sun et al., 2002; Wei and Varela, 2003; Tian and Estrin, 2008; Ng et al., 2009; Liu et al., 2012). The literature also notes political influences and social objectives (e.g., employment) within SOEs (Shleifer and Vishny, 1994; Boubakri et al., 2011; Li and Yamada, 2015). Shareholder theory asserts a singular profit objective (Friedman, 1999), while stakeholder theory (Jensen, 2001) recognizes multiple objectives for diverse stakeholders. Market mix theory (Sappington and Stiglitz, 1987; Stiglitz, 1994) argues that ownership form matters less than competition and that state social objectives (employment) can be valuable, implying potential synergy in mixed ownership. This sets up hypotheses on dual objectives, non-linear ownership-performance links, employment intensity and stability, management incentives, and central versus local government effects.

Design: Empirical panel analysis testing market mix theory and seven hypotheses (H1–H7) on dual objectives, employment intensity/stability, over-employment, managerial incentives, mixed-ownership value, and central vs. local control effects. Data: Unbalanced panel of publicly listed Chinese firms on SHSE and SZSE from 2001–2011. Data source: CSMAR (GTA). Exclusions: ST/ST*/PT firms, extreme ROE outliers (>|500%|), and H-share issuers. Final sample covers on average 2,536 firms per year, totaling 27,896 firm-year observations. Industry distribution: predominantly industrial (62.2%). Ownership/Control Classification: State ownership (STATE) measured as the percentage of shares held by government entities; STATE2 is its square. Central vs. local control identified from the “actual controlling person” in CSMAR; manual classification using Chinese names (e.g., “China,” “National,” “Central” for central; province/city/town names for local). Firms with unclear controllers were excluded. Variables:

• Financial performance: Tobin’s Q = (Market value of equity + Book value of liabilities)/Book value of assets; Annual stock return (dividends adjusted).
• Social performance: Employment intensity = Employees/Assets; Job stability = annual percentage change in employees.
• Dual performance: DUAL1 = ln(Employees) × Tobin’s Q; DUAL2 = ln(Employees) × Stock Return.
• Manager compensation: Total compensation of top three executives (also total management compensation in robustness).
• Controls: Ownership (ASHARE, LEGAL, EXECUTIVE), governance (INDDIR, DUAL), firm characteristics (SIZE, LEVERAGE, ROS, FREECASH), industry (6 groups) and regional dummies (4 regions). Econometrics: Panel least squares with random effects and period effects; heteroskedasticity-robust (White) standard errors; Newey-West corrections and cross-sectional LS in robustness. Non-linear effects captured via squared ownership terms and interactions (STATE × ln(Employees) for H4).

• Non-linear relationship between state ownership and financial performance (H1, H6): Figures and regressions show concave (inverted U) relationships. For Tobin’s Q, as state ownership rises from 10% to 20%, Q increases from ~0.3 to ~0.5; it remains ~0.5 between 20–70% and declines to ~0.4 above 70%. For annual returns, returns rise from ~5% to >20% between 10–20% state ownership, remain >20% for 20–50%, and fall below 10% above 60%. Table 5 indicates STATE positive and STATE2 negative with Q (Model 1: STATE 0.067, STATE2 −0.194; both p<0.01) and with returns (Model 3: STATE 1.009, STATE2 −1.147; p<0.01), consistent with mixed ownership performing best.
• Mixed ownership outperforms (H6): The concave state–performance relationship implies mixed/partially privatized SOEs deliver higher economic value than highly private or highly state-controlled firms. Robustness using a dual performance metric (Tobin’s Q × Employment intensity) shows STATE+LEGAL positive and significant with a negative squared term (Table 9, Model 3), confirming an inverted-U pattern for combined objectives.
• Employment intensity increases with state ownership but non-linearly (H2): Table 6 (Model 1) shows STATE 0.027 (p<0.01) and STATE2 −0.032 (p<0.01) for Employment/Assets, indicating an inverted-U. ASHARE positively relates to employment intensity (p<0.10), LEGAL negatively (p<0.01). Executive ownership (EXECUT) and CEO duality (DUAL) are negatively associated with employment intensity (p<0.10 and p<0.05, respectively).
• Employment stability (H3): State ownership has significant non-linear effects on job stability (employment change) (Table 6, Model 2; STATE 0.160, STATE2 −0.179; p<0.05). Central vs. local control matters: CENTRAL/LOCAL dummy is positive for employment change (0.030; p<0.01), implying central control is associated with larger changes (lower stability), while local control associates with smaller changes (higher stability). Figure 4 shows a negative relation between state ownership and employment change.
• Over-employment trade-off (H4): Financial performance declines with the interaction of state ownership and employment. The interaction SOEPXEENO (STATE × ln(Employees)) is −0.0428 (t=−6.83; p<0.01) for Tobin’s Q (Table 7), supporting that SOEs sacrifice profitability to maintain employment, including during the 2008 crisis period captured in the panel.
• Management incentives (H5): Manager compensation rises with employment in a non-linear fashion. Table 8 shows EMPLASSET −24.55 (t=−11.03) and EMPLASSET2 34.70 (t=5.06), indicating a positive non-linear relation between standardized employment and compensation; EXECUT (4.151; p<0.01), INDDIR (1.278; p<0.01), ROS (0.462; p<0.01), and SIZE (0.214; p<0.01) also positively relate to compensation.
• Central vs. local government effects (H7): For Tobin’s Q, central control associates negatively (CENTRAL/LOCAL coefficient −0.029; p<0.01) while local control associates positively; for annual returns, central control is positive (0.053; p<0.05) and local negative (Table 5). For employment intensity, central control is negative (−0.002; p<0.01) and local positive; for job stability, central control increases employment change (less stable) and local control reduces it (more stable). Overall, local control better aligns dual objectives of employment and firm value (Tobin’s Q), while central control is linked to higher stock returns and more visible market support.
• Governance effects: Independent directors (INDDIR) have strong positive effects on financial performance (e.g., Table 5: significant and largest positive coefficients across models), suggesting board independence improves outcomes. ASHARE and LEGAL often negatively relate to Tobin’s Q in baseline models (Table 5), consistent with complex ownership-social objective trade-offs.
• Robustness: Results hold under alternative specifications, including ROS as DV (non-linear state effects: STATE −0.101; STATE2 0.241; both significant), combining STATE and LEGAL to address endogeneity (concave effects persist), and alternative dual performance measures.

Findings substantiate that Chinese SOEs pursue dual objectives—economic performance and employment—consistent with market mix theory. The inverted-U relationship between state ownership and both financial and employment outcomes indicates that partial privatization enables synergistic benefits: state backing and social mandate combine with market discipline to produce superior performance relative to purely private or purely state control. Positive INDDIR effects highlight the role of governance in complex ownership settings. Evidence of over-employment (negative STATE × Employment effect on Tobin’s Q) confirms a deliberate trade-off favoring social stability, particularly salient during downturns. Central versus local control shapes outcomes differently: local control aligns with improved Tobin’s Q and stronger commitment to employment and job stability, while central control correlates with higher stock returns (possibly due to greater market-level interventions) but less employment intensity and stability. Overall, the results directly address the research questions by demonstrating the reality and materiality of employment as a firm objective in SOEs and the optimality of mixed ownership for achieving stability and prosperity.

The study supports market mix theory in the Chinese SOE context: employment is a substantive organizational objective that coexists with shareholder value. Mixed (partially privatized) ownership structures achieve superior combined economic and employment performance relative to highly private or highly state-controlled firms. Local government control is especially effective for balancing dual objectives, while central control influences stock market outcomes more strongly. Evidence also indicates over-employment, with profitability partially sacrificed to maintain social stability. These insights endorse China’s mixed-ownership reforms as a mechanism for achieving national goals of stability and prosperity. Future research should develop integrated political-economic and financial theories of privatization that explicitly incorporate social objectives (e.g., employment) and explore causal identification strategies for ownership effects.

• Data and scope: Proprietary CSMAR dataset; sample limited to listed firms on SHSE/SZSE from 2001–2011; exclusion of ST/ST*/PT and H-share firms may affect generalizability to all SOEs.
• Measurement/classification: Central vs. local control determined via name-based/manual classification, which may introduce misclassification risk.
• Endogeneity: Potential joint determination of ownership structure and performance; addressed partly by combining STATE and LEGAL ownership in robustness but without full instrumental variable identification.
• Business cycle: The analysis spans the 2008 crisis but does not explicitly model business cycle effects.
• Performance measures: Differences between Tobin’s Q and stock returns (market inefficiencies/interventions) may affect interpretation of financial performance results.