China’s SOE Reform and Technological Change: A Corporate Governance Perspective

Since the beginning of its economic reforms in 1979, China has been searching for an effective corporate governance system for its state-owned enterprises (SOEs). Although some progress has been made, a large proportion of SOEs remain inefficient and uncompetitive, and in general they have failed to exploit their advantages in scale, experience and resources. This paper argues that this is mainly due to poor corporate governance, in the broad sense of control relationships. The structure and culture of these relationships creates poor disciplinary and incentive mechanisms, and these not only cause poor management in a day-to-day sense, but distort technological development. Management has an incentive, in general, to avoid spending over the long term, and in particular to avoid investment with low visibility. We show how this tends to privilege the upgrading of technology in such a way that the enterprise remains dependent on external sources. We conclude with proposals to change the financial and corporate governance system to improve the situation.