Lec 8 Industrial Development

pre-reforms: the SOE’s

command energy

• the SOE did not much possess the strategic-planning decisions, marketing, logistics, or personnel decisions, with little autonomy under the plans

• the planning department controlled production taregets, the material department controlled raw material suppplies, the commerce department controlled sales

the state took SEOs profit

and the state made up soe’s losses, and they could count on surviving with these support, referring to the soft budget constraint

pre-reforms: the SOE’s goals

• profit making as a production unit

• SOE’s also served as multifunctional social units, providing workers with childcare services, educational serviced, medical care services

SOE’s 1979-mid 1990s

market had been gradually growing out of the plans

dual-track prices

• price within the plan, set by the government

• price outside the plan, set by the market

• → prise regulations gradually phased out for most commodities

SOE’s started to be involved in both the plan and the market → allowed to use additoinal capacity for production of above-plan market goods

→ increased autonomy ; making production strategies, choosing well performed managers, and buying and selling extra plan porducts in the market

→ increasing incentives : allowing firs to keep their extra-plan profit (responsibility contracts systems = turning over a fixed amount of profit, sometimes with certain rates in profitability, and they can keep the rest)

SOE’s reforms 1996-now

• downsizing : chronic loss-making entreprises were closed down or sold

• grasping the large, letting the small go : large state-owned firms were corporatized and merged into large industry groups under the contro lof the state, small firms privatized of closed down

• dismantling the social roles of firms

• corporatization

• setting up public ownership agencies

during the grasping the large, letting the small go strategic focus, the central government industry was increasingly concentrated on

energy, natural resources, and a few sectors with substantial economies of scale

sectors were often protected by high barriers to entry, with regulatory policies, and they remained profitable

corporatization of SOE’s

the company law provided a framework for corporatizating SOE’s to convert traditional SOE’s into the legal form of the corporation which is supposed to be more appropriate in a market economy → imrpoving corporate goverance of SOE

→ clear property rights clear rights and responsibilities, separation of government and entreprise, scientific managemnt

traditional SOE were converted into joint-stock corporations or limited-liability companies

the State Asset Supervision and Administration Commission (SASAC)

is an ownership agency, empowered to exercise the government’s ownership rights over government firms

government control as primarly ownership

Central SASACs had no ownership claim on other state-owned companies that fully owned by local governments

local government-run factories were smaller than those of the central government, operated in a wider range of sectors, were more exposed to competition and consequently were less profitable

objectives of SASAC : state asset supervision and andministration commission

• create oligopolistic competition → competition

• concentrate assets in a few sectors → national security, natural resources, or natural monopoly characteristics : military, electric, oil, telecommunications, coal, civil aviation, and transport (keep a bit in steel, electronics, machine building, automobile)

• focus on core business

SOEs have systematically larger presence in

capital intensive sectors, including electricity, oil, telecommunication, coal, civil aviation, and transportation

what happend with sectors where capital requirements are modest

(textiles, garnments, plastic and metal products)

the TVE’s and private forms entered and gradually established dominant positions