Private Enterprises and China’s Economic Development

Citation

(2008), "Private Enterprises and China’s Economic Development", Journal of Small Business and Enterprise Development, Vol. 15 No. 4. https://doi.org/10.1108/jsbed.2008.27115dae.002

Private Enterprises and China’s Economic Development

Article Type: Bookshelf From: Journal of Small Business and Enterprise Development, Volume 15, Issue 4

Edited by Shuanglin Lin and Xiaodong ZhuRoutledgeAbingdon2007xvii þ280 pp.ISBN: 0 415 77147 1

Keywords: China, Entrepreneurship, Economic development

This volume opens with an informative Introduction and Overview written by the Editors, Shuanglin Lin and Xiaodong Zhu who document the resurgence of private enterprises in China as a response to economic stagnation and growing unemployment. The editors acknowledge that despite their widely recognised contribution to economic development, private enterprises still face considerable obstacles in China, including discrimination by state monopolised banks, punitive taxes, fees and levies, a weak legal system and competition from state-owned enterprises. This book sets out to propose a range of the solutions to how private enterprises could overcome barriers to growth and development. The volume under review is divided into four parts, each focusing on a specific set of barriers or obstacles.

Part one incorporates four chapters that critically evaluate financial reforms and their impact on enterprise development in China. It emerges that the difficulty in gaining access to relevant credit represents a major obstacle to the development of private enterprises in this country. Most of the financial institutions in China are still owned by the state and tend to exhibit a distinct bias and/or preference towards lending to large and/or state-owned enterprises. One solution to this problem could involve the introduction and development of dedicated rural financial institutions that would depend primarily on private capital and underwrite the emergence and development of a growing mass of small rural enterprises. Another solution could entail the public listing of small enterprises and this would provide the necessary growth capital, mostly raised from shareholders. There is, however, an obvious need for further financial sector reforms in China and a move to liberalise bank lending rates to reflect the risks associated with the financing small and medium-sized enterprises.

The three chapters in part two focus on issues related to private enterprises, efficiency and economic growth. It emerges that several factors contribute to the profitability of regional state owned enterprise, including size of investment and exports as well as import share. Interestingly, state owned enterprises that are located in regions with a higher proportion of government spending are more likely to return lower profit rates. Typically, however, the share of overall investment in collective and private enterprises tends to be positively related to business growth. In relation to regional growth in China, it appears that expansion rates are negatively related to the size of the state sector. In addition, higher economic growth rates are returned in regions that typically exhibit more investment capital and bigger bank deposits.

A further three chapters in part three deal with openness, legal protection and private enterprises. Since 1998, private enterprises in China began exporting their products and services. During the last decade, exports grew significantly and became the key driver of productivity increases in private firms in this country. It emerges that the size of investment in Research and Development is positively related to productivity growth in private firms but negatively associated with productivity in state owned enterprises. Not surprisingly, China’s tremendous economic growth makes a considerable demand upon the nation’s resources, including energy consumption. Although the growing demand for energy comes from businesses of all sizes and ownership mixes, the supply remains firmly in the possession of the state. There is an obvious need for a relevant public policy that would ensure and maintain a sustainable balance between the growth of China’s economy and its government’s efforts to protect the country’s endangered environment. One of the most important legal developments in China involved the passage of the 1994 Administrative Litigation Law which governs disputes between private entities and a wide range of governmental agencies. In retrospective, the usage of this law proved to be of symbolic as well as practical nature and has led to a steady rise in the annual rates of administrative cases prosecuted and defended in relevant judiciary courts. Nevertheless, conventional wisdom in China acknowledges the fact that a general lack of judicial independence from the state invariably results in private rights not being fully protected.

There are four chapters in part four, presenting issues pertinent to private enterprises, employment and earnings in China. Beginning with the economic reform of 1978, the conversion of the centrally planned Chinese system into a market led economy was closely related to the transformation of a largely agrarian society into a modern, industrialised nation. As a result, most of private enterprises in the initial wave emerged in rural regions. A relaxation of labour mobility controls facilitated the reallocation of labour from agriculture to entrepreneurial activities. Therefore, an incremental increase of efficiency from privatisation could have a positive effect on general employment. Unfortunately, however, it appears that there are still barriers to rural and urban mobility and these could reduce marginal returns to education in both areas. Since the late 1990s, radical property rights reforms in China have resulted in a significant number of township and village enterprises being privatised. The unequal distribution of ownership shares among managers and employees resulted in a sharp increase in earnings inequality and resulting income disparity. As a negative outcome, this has contributed to a widening gender wage gap and regional income disparity.

As the recent market oriented economic reforms that have stimulated and supported China’s transformation are likely to provide a fertile ground for growing entrepreneurial activity, private enterprises are expected to flourish and possibly become the dominant force in this country. The overall contribution of this monograph in terms of empirically rigorous research, insights and policy suggestions, is considerable. A wide range of stakeholders and interested parties could benefit from reading it selectively or as a valuable contribution to their knowledge base. I would therefore recommend it not only to academics, researchers and specialist advisers but also to policy makers and economic observers who would gain from this detailed, critical and insightful analysis of China’s economic miracle.

Harry Matlay Birmingham City University, Birmingham, UK