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Business–Government Relations and Corporate Governance Reforms

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Business, Government and Economic Institutions in China

Part of the book series: International Political Economy Series ((IPES))

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Abstract

Corporate governance in China principally suffers from inside owners expropriating from outside owners, and to a lesser extent from managers expropriating from a firm’s owners. China’s companies have followed two divergent corporate governance reform trajectories, corresponding to two models of business–government relations: the Guangdong model and the Shanghai model. In the Guangdong model, the local government maintains weaker ties to Bei**g, a more fragmented bureaucracy, and better organized private firms. The Shanghai model displays the opposite tendencies. As a result, private firms have played a bigger role in driving corporate reforms in Guangdong as compared to Shanghai.

I would like to thank Pan Rongfang for helpful research assistance.

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Notes

  1. 1.

    Using the 20% share ownership threshold employed by La Porta et al. (1999) to identify the existence of controlling shareholders means that most listed firms have at least one controlling owner. With this control, an owner can expropriate from minority shareholders via outright theft and fraud or through more subtle means such as intercorporate loans, loan guarantees for related companies, favourable transfer pricing for related companies, and via the dilution of new shares.

  2. 2.

    This is a common practice among family-owned firms in general (Bennedsen et al. 2007; Morck et al. 2000; Perez-Gonzales 2006).

  3. 3.

    See Kim et al. (2010) chapter 8 for a discussion of how takeovers act as an external governance tool.

  4. 4.

    Because bankruptcies (financial failure) are unlikely, as mentioned earlier, the type of failure that managers fear is liquidation (economic failure).

  5. 5.

    For example, the Korean firm, POSCO, is often regarded as a role model in the steel industry.

  6. 6.

    “Beginning in 1980 it was agreed that Guangdong would remit only a small and fixed amount of its revenues for five years to central government given the low level of Bei**g’s expected investment and expenditure in the province. In effect this was a financial contract between the PRC and Guangdong Province: Guangdong guaranteed to supply Bei**g with a certain amount of revenue, and had full use of any surplus it could generate” (Goodman and Segal 2002, 187).

  7. 7.

    The semi-official associations began with compulsory membership. But it was difficult to achieve complete coverage of the industry since there were numerous enterprises and most of them were small. And governments did not have effective ways to punish those enterprises that did not participate. Under such circumstances, membership later became voluntary. Of course, low coverage of membership in industries causes difficulty for effective regulation and coordination since non-members do not obey the rules set by associations.

  8. 8.

    The issuer must normally have a trading record of not less than three financial years under substantially the same management. The expected total market capitalization at the time of listing must be at least HK$200 million and the total capitalization of securities held by the public must be at least HK$50 million. The issuer must also satisfy the profit test, the market capitalization/revenue/cash flow test, or the market capitalization/revenue test.

  9. 9.

    BYD annual reports, various years.

  10. 10.

    For their roles and duties, see BYD “Annual Report 2008,” p. 24.

  11. 11.

    CPCA, China Auto Sales Hit Record High of 21.98 Million in 2013.

  12. 12.

    He, Laura. 2015. “Uber enters electric-car market in tie-up with B YD” MarketWatch, 16 March. Tian, Ying and Ho, Chua Kong. 2014. Buffett -Backed BYD Says Chinese Cars to Debut in U.S. Bloomberg Business, 7 January.

  13. 13.

    This is according to annual reports from 25 listed Chinese carmakers. China Daily—Hong Kong Edition, 27 June 2011. “Short Torque.”

  14. 14.

    AFX Asia, “China’s SAIC to set up holding company for overseas listing – report,” 28 December 2004.

  15. 15.

    Francesco Guerrera, “Downturn may hit SAIC listing,” 10 January 2005, Financial Times.

  16. 16.

    FAW and Guangzhou Automobile Group (both SOEs) also benefited. Ran, Yu. 2013. “Govt departments purchasing more locally made cars,” China Daily USA, 21 March.

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  1. China Europe International Business School, Shanghai Shi, China

    Richard W. Carney

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  1. Alliance Manchester Business School, University of Manchester, Manchester, United Kingdom

    **aoke Zhang

  2. Institute for Advanced Study in Humanities and Social Sciences, Zhejiang University, Hangzhou, Zhejiang, China

    Tianbiao Zhu

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Carney, R.W. (2018). Business–Government Relations and Corporate Governance Reforms. In: Zhang, X., Zhu, T. (eds) Business, Government and Economic Institutions in China. International Political Economy Series. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-64486-8_8

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