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Korea is a striking instance of a country in which state policies were able to deliberately change the size structure of firms in a short period of time, from one biased towards large firms to a more even distribution. The Indian policy contrasts starkly from the Chinese post-reform industrial policy, which seems to have encouraged the rapid growth of large export-oriented firms based on foreign direct investment.
The Chinese case is an especially interesting one, not only because of the importance of China in recent Asian industrialization, but also because industrial policy and its changes over time have critically influenced the relative importance of different types of enterprises, which has resulted in the skewed distribution to the right, as shown in Table 2.
The relative importance of these types and the shares of each type in terms of critical economic magnitudes are given in Table 2. Before the reforms of the Chinese economic system, the manufacturing sector was dominated by SOEs. In the first stage of the reforms in the s, SOEs lost their importance through privatization or acquisition by indigenous private enterprises and multinationals. Unlike the privatization process followed in the former Soviet Union and Eastern European countries, China did not pursue a policy of quick and massive privatization.
At a later stage of the gradual privatization programme, China initiated the shareholding programme in , which became a principal vehicle of privatization creating the SHR category in Table 2. The SOEs have lost their share of output gradually but quite substantially.
Apart from the significant growth of SHR units, the growth of private firms has been quite remarkable, when we remember that legally such firms were not officially written into the constitution until March An unusual type of enterprise, nominally under the control of local governments but propelled largely by local entrepreneurship, made its appearance in the first decade of post-reform China. Also called town and village enterprises TVEs , these establishments grew rapidly in the s, increasing their share of industrial output from A shift in industrial policy preferences in the post-Tiananmen decade saw an equally significant decline in the importance of this category as its share of output fell to Source: Xu , Table 3.
The reference time for the Census is 31 December , and the flow data cover the whole of Source: As in Table 2. Unit of values: thousand RMB. Unit of employment: persons. Turning to the mean values of relevant variables in Table 2. The SHRs are the next group of large firms, and are clearly more efficient than the SOEs, with a much lower use of capital per labour and higher labour productivity. We also see that the purely private firms, which as indicated grew under an uncertain legal environment, are generally on the small side.
Although accounting for nearly two-thirds of all manufacturing firms, their mean output is very small, pointing to their low capitalization and labour productivity. Although the share of total output of such firms was much higher than that of the COEs in , these two categories are on more or less the same level in terms of key economic ratios such as capital per worker, labour productivity, and wage levels.
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Nevertheless, in , private firms accounted for no less than one-third of manufacturing employment, compared to only 7. There are substantial differences between labour productivity and wages—which indeed partly relate to firm size. Although the wage per employee is as high in SOEs as in OECD firms, the labour productivity in the former is substantially lower, again pointing to their relative inefficiency.
The difference in wage level by ownership category otherwise follows labour productivity differentials. This is partly the consequence of differences in average size and partly in the use of educated labour. The fact that the mean employment size of SOE firms is so much larger than that of the others might suggest that the overall size distribution of Chinese manufacturing firms is the result of mixing up different categories of firms.
This is only partially true. But the share of SOEs, which would be in this group, was only At the other end, although the mean employment size of PRVs was 35, the proportion of employment in all manufacturing with fewer than 50 workers was 20 per cent, with the PRV units accounting for It is apparent that the size distribution of the different categories is overlapping. The proportion of employment in the largest size group is enhanced by the inclusion of SOEs, and the share of the smaller size groups is augmented by the inclusion of PRV and COE firms, while the foreign categories HMT and OECD augment the share of middle-sized groups between the two extreme groups.
The different pattern distinguishing China from the East Asian equitable distribution size structure should, however, be apparent. The large proportion of employment in the 5—9 size group found in the East Asian economies is absent in China. Indeed, even if we increase the upper limit of small firms to 50 workers, the share is much larger in East Asian and indeed other Asian economies.
The Chinese Renaissance and Its Currency Conundrum | SpringerLink
The middle size group of 50— workers in China employs about a quarter of the total workers in manufacturing. But it is easily swamped by large units, which account for the bulk of employment in the state-owned, joint ventures SHR , and foreign categories. Changing industrial policies in China have been critical in the evolution of the current size structure of manufacturing in the first decade of the century. This wave of reforms was in the first place fuelled by the desire to decentralize the power of the central government to local branches of the state, including provincial and rural authorities.
Some of the industrial enterprises owned and promoted by the local governments were collective enterprises. In , out of a total of But it was the last category that grew in importance over the years. By , with a doubling of the total employment in the TVE sector, the proportions of the different categories had changed to For much of this period, Chinese official policy did not recognize private ownership.
Thus many of these private enterprises were counted in official documents as TVEs theoretically under the ownership and control of local governments, although the authorities knew very well that they were really private enterprises. The majority of these effectively private TVEs were medium-sized enterprises located in rural areas. The second wave of reforms in the s saw the official recognition of private enterprises as viable establishments for industrial development, and this was also the period which saw a substantial privatization of SOEs.
Privatization of the large SOE sector in the s and beyond has followed a different route from the Soviet or other East European models. The rate of shrinkage of the state enterprise sector has been much slower and the ideological resistance to wholesale privatization has been strong. The resultant impact on the size structure of manufacturing has been threefold.
First, the state sector has continued to play an important part in manufacturing. Second, the private sector, although showing a great deal of dynamic growth, has not produced a sizable number of large firms. They are significant in the 50— size group but there has been a very limited development of conglomerates which have been so important in the growth of East Asian economies and even of the Indian manufacturing sector. Third, the importance of foreign-invested enterprises FIEs from both neighbouring areas and from the OECD has been a significant development of Chinese manufacturing.
Huang , has strongly argued that the second and third features of the size structure are related. It is the constrained development of domestic private sector firms that left a vacuum in the Chinese system for FIEs to fill. Foreign firms also participated significantly in joint ventures when a section of the SOEs were privatized. Huang attributes this superior performance of FIEs to elements of the Chinese industrial policies.
The result was the product of political aspects of the policy, rather than economic aspects.
The argument, in a nutshell, is that in the political pecking order, SOEs were the preferred type of enterprise, but that private domestic enterprise was further down than foreign investment. This ordering was the result of a profound and continued suspicion of private property even after the reforms. Thus when an opportunity for export-led growth presented itself and SOEs were not efficient or flexible enough to seize the opportunity, it was FIEs rather than private domestic enterprises which were in the forefront of growth.
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Two of the important reasons for the dominance of political, rather than economic, advantage of FIEs cited by Huang are the following. To begin with, China was already building up a sizable pool of surpluses on the current and capital accounts when FDI liberalization took place in Thus, FDI dominance was not driven by the necessity of augmenting the savings ratio.
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A further relevant point to consider is that foreign capital inflow took the form of foreign-invested enterprises rather than the alternative of contractual arrangements by which foreign firms contract domestic suppliers to provide the necessary output for export markets. In fact, China is unique among other economies with large incidences of FDI in having FIEs in a whole range of industries; the more common experience is for FIEs to be concentrated in a few industries in which domestic production might be constrained for technological reasons.
The principal instruments through which the less-favoured position of domestic private firms became effective were the institutions for the supply of finance capital and land—both of which were subject to dominant forms of state control. While the detailed process of FIE development and the factors affecting it remain a subject of discussion and further research outside the scope of this book , the results given in Tables 2. FIEs accounted for 21 per cent of total manufacturing employment in , and an even higher proportion 32 per cent of output. The role of FDI would of course be significantly higher in both employment and output if we take account of its participation in joint ventures SHRs.
Finally, we should make some reference to the virtual absence of small firms from the size structure of manufacturing in China—a striking contrast with the experience of other Asian economies. This is particularly remarkable since the development of TVEs showed the dynamic nature of Chinese entrepreneurs.
It seems that the household enterprises employing fewer than eight workers , which flourished under the TVE umbrella, were very much a rural phenomenon. Evidently the houkou system under which households were required to register their residence which was rationed for migrants into the urban area had an impact on the development of small-scale urban enterprises.
Another relevant point to emphasize is that the constrained development of private manufacturing firms itself dampened the growth of small enterprises.
We have seen that the recent experience in the trend in size distribution in manufacturing in developing Asia has not particularly favoured the SME sector. In quite a few cases of the fast-growing economies—notably China—the growth process has been driven by a relatively rapid growth of larger enterprises in manufacturing.
In the two cases in which the small enterprises have held their own India and to a smaller extent Indonesia , the pattern of size distribution has shown a conspicuous feature of the missing middle, with its attendant problems.