179 Table 7: Vertical variation in state ownership
(1) (2) (3)
Largest shareholder (%)
Log of shareholding by MBMs
MBMs shareholding
dummy State-ownership-level dummy
(1=province-level SOE)
5.505***
(1.194)
-0.733***
(0.238)
-0.611*
(0.369)
SOE holding group dummy 1.985** -0.133 0.0745
(0.988) (0.149) (0.292)
Listing year 0.522*** 0.222*** -0.104***
(0.118) (0.0292) (0.0343)
Log of total assets 0.00398 0.00688 -0.0892
(0.125) (0.0281) (0.0669)
Leverage -0.00562 -0.000424 0.00617
(0.0193) (0.00342) (0.00616)
Return on assets 9.687*** -0.235 -0.0230
(3.283) (0.694) (1.592)
Year, industry, and province dummies
Yes Yes Yes
Constant -1,008*** 210.1***
(235.6) (68.81)
Observations 5,615 3,108 5,622
Number of Stkcd 742 531 742
Notes: Models 1 and 2 are random effects models. Model 3 is a random-effects logistic regression. Robust standard errors clustered at firm-level in parentheses. ***statistical significance at 1% level (p-value < 0.01). **statistical significance at 5% level (p-value < 0.05). *statistical significance at 10% level (p-value < 0.1). Sample period 2008–2016.
4.3 Robustness check
We ran two sets of analysis as robustness checks on the result changing the dependent and independent variables (see Appendix 10): First, we estimated models on the top five shareholders’ percentage ownership and assets owned by MBMs (based on their shareholding percentage) to account for differences in company size. Second, we changed the categorization of provinces to be time-variant and re-assessed using each year’s data. The tests confirmed the results from the main models.
180 corporate governance within the group of listed local-SOEs. In this section, we discuss our findings in the context of current debates within research on comparative (state) capitalism, Chinese institutional reforms, and SOE governance.
5.1 Horizontal Subnational Institutional Diversity and Corporate Governance
Variety in corporate governance of listed local-SOEs in China reflects the diversity in state–
market relations as well as institutional change over time. Our study moves beyond frameworks of state capitalism in the management literature (Musacchio et al., 2015), and the one-dimensional approach to local institutional variety (Alami & Dixon, 2020; Choi et al., 2015; F.
Hu & Leung, 2012; Jia et al., 2019; X. Liu et al., 2014; Shi et al., 2012). Building upon a typology of state capitalist diversity within China (Peck & Zhang, 2013; Rithmire, 2014;
Walder, 1995; J. Zhang & Peck, 2016; X. Zhang & Zhu, 2017), our study demonstrates that state direction of the economy and market coordination of socioeconomic activities, and different combinations hereof, affect corporate governance structures of listed local-SOEs. As we hypothesized, we found that provinces with high business coordination of socioeconomic activities and low state direction of the economy tended to have higher shareholding by MBMs.
However, in contrast to our expectations, these provinces also had high concentrations of ownership. This suggests that the legal determination theory of ownership concentration does not apply, and that localities with developed market institutions protect their local-SOEs to a larger-than-expected extent against ownership diversification and takeovers (Ye, 2017). This might also be explained by earlier studies that found greater eagerness in poorer cities and counties (i.e., with lower concentration of business services/intermediary institutions) to raise funds by diluting their ownership in local-SOEs, either through market-based opportunities or by entering into partnerships with central SOEs (Cao et al., 1999; C. I. Chen, 2014).
Our results imply that measuring subnational institutional diversity only in terms of “private sector development” (Jia & Mayer, 2017) will not capture differences in business coordination of socioeconomic activities in the Chinese context. In fact, in our study shows that Chinese provinces score differently in the proposed two-dimensional approach to local variations in state capitalism. For example, while Jiangsu and Zhejiang provinces have equally developed private sectors and equally limited credit allocation to local-SOEs, business associations in the former are largely funded and controlled by the local government, which is reflected in low to modest assistance from industry associations (Zhang & Zhu, 2017, p. 106) (see appendices 4 and 5). By contrast, many grassroots business associations initiated and led by private entrepreneurs
181 themselves have emerged forcefully and played active roles in the process of socio-economic change in Zhejiang, which we see reflected in a very high score on assistance from business associations (Zhang & Zhu, 2017, p. 106).
Furthermore, we find Chinese provinces with very high government quality, highly developed business coordination of socioeconomic activities but also a high degree of state direction of the economy. This is particularly evident in Beijing and to some degree in Shanghai. This might suggest that the level of private sector development alone is not necessarily a comprehensive proxy for government quality, as previous studies have assumed (Choi et al., 2015; Jia et al., 2019). We suggest that these provinces are “interdependent state capitalist economies”
characterized by relatively large state sectors, high quality of government and well-developed business associations. They are different from networked state capitalist economies (such as Guangdong and Zhejiang), where the state direction of the economy is much lower. In general, the institutional calibrations of state capitalist models suggested in our study, could be explored further since they are likely to have consequences beyond corporate governance in areas such as internationalization, outward foreign direct investments, and firm strategy (Chan et al., 2010; J.
Li et al., 2018; X. Liu et al., 2014; X. Ma et al., 2013; Shi et al., 2012).
5.2 Vertical Subnational Institutional Diversity and Corporate Governance
Our findings confirm vertical diversity within Chinese state ownership associated with the hierarchical level of the local government owners in listed local-SOEs. In particular, city-level (and below) SOEs had significantly more outsider-controlled and marketized corporate governance structures, in terms of higher shareholding by management and the board as well as lower concentration of ownership, compared with province-level SOEs.
These findings may suggest that the central–local divide in corporate governance may apply not only when comparing city-owned enterprises with central-level SOEs, but also when comparing province-owned to city-owned enterprises. In fact, the difference might be larger within locally owned SOEs. For instance, Teng et al. (2018) estimated that the average difference in concentration of ownership in central vs city-owned enterprises was 1.12%, whereas our study shows an average difference of 5.5% between a city-level and a province-level SOE. This might indicate that provincial SOEs have been protected from ownership diversification to a similar, or even larger, extent than central-level SOEs.
182 Such corporate governance difference between province- and city-owned enterprises, as observed in our study in case of listed firms, are likely to be related to institutional changes in the context of SOE-reform from 1997–2003 (Zeng & Tsai, 2011). These resulted in hardening budget constraints and changed incentives related to diluting ownership or privatizing local-SOEs, which played out differently depending upon administrative ownership level (Cao et al., 1999; Tong, 2009). Furthermore, the province–city divide also reflects a higher degree of market-orientation in city-owned enterprises, which are under harder budget constraints and function more as commercial vehicles for profit than province-level SOEs (Weiye Li &
Putterman, 2008).
Our study suggests that we find the least politicized and most marketized SOEs among city-level enterprises located in “Networked” provinces such as Zhejiang, Guangdong or Fujian. It is likely that city-owned enterprises in such localities function more as commercial vehicles for profit than as development instruments.
6. Conclusion, limitations and future research