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Abstract:
This paper is the first chapter of a forthcoming book, Capitalism with Chinese Characteristics (New York: Cambridge University Press, July 2008). The book is a narrative account of the evolution of capitalism in China in the last three decades. (The year 2008 marks the 30th anniversary of economic reforms in China.) The research is based on detailed archival examinations of policy, bureaucratic and bank documents as well as several waves of household and private-sector firm surveys. As an example, I have examined a 22-volume collection of memoranda, directives, operating manuals, rules of personnel evaluations issued by the presidents of China's central bank, all the major commercial banks, rural credit cooperatives, etc. A detailed synopsis of the book appears after this page.

This paper presents the framework for and the summary findings of the entire book. The highlights are:

- Many economists used output share of private sector as evidence that China's business environment became more liberal over time. Measured by output share, China's private sector has grown enormously since 1978. But output share is not an accurate measure of private sector policy because it is correlated with efficiency differentials between private-sector firms and state-owned enterprises (SOEs). During the 1989-1991 period when China cracked down on private sector, the output share of private firms still increased. Another example is from the former Soviet Union. Private agricultural output was quite high because private farming was so much more efficient than state farming. This is not evidence that the former Soviet Union was pro-private sector.

- A superior measure of policy evolution is capital allocation. By this measure the most liberal policy period, by far, was in the 1980s and in the 1990s the investment share by purely private sector businesses fell substantially. (The share only began to rise after 2002.)

- The changing investment share by the private sector suggests a development few Western academics have noticed - a substantial policy reversal in the 1990s. Survey and documentary evidence suggests that private access to finance was easier in the 1980s than in the 1990s and this was especially true in rural China.

- Evolution of capitalism in China is a function of a political balance between two Chinas - the entrepreneurial, market-driven rural China vis-à-vis the state-led urban China. In the 1980s, rural China gained the upper hand but in the 1990s, urban China gained the upper hand. Although China made notable progress in the 1990s in terms of FDI liberalization and reforms of SOEs, this book assigns greater weight to the rural developments in determining the overall character and the pace of China's transition to capitalism.

- Many economists rely on GDP data to formulate their view of Chinese economy. The tale of the two decades is not reflected in the GDP data but is reflected in the household income data (obtained through surveys). Rural household income grew substantially faster in the liberal 1980s than in the illiberal 1990s. Also social performance deteriorated in the 1990s as well.

China, transition, entrepreneurship

Abstract:
China is one of the most popular investment destinations in the world. This paper argues that FDI inflows into China are in fact driven by some fundamental inefficiencies in the Chinese economy. Specifically, one of the inefficiencies has to do with a high level of fragmentation of both goods and asset markets. This fragmentation increases demand for FDI both because market fragmentation makes indigenous Chinese firms uncompetitive and because market fragmentation creates more investment opportunities for the mobile foreign capital. This paper is a chapter from a larger book-length research project, tentatively entitled, Selling China: The Institutional Foundation of Foreign Direct Investment During the Reform Era.

FDI, capital market, transitional economies

Abstract:
In this paper, we use a unique dataset covering joint ventures in two provinces of China, Jiangsu and Zhejiang, to test the effect of the institutional environment for domestic private firms on ownership structures of FDI projects. Unlike many studies on this subject, we approach the issue from the perspective of local firms seeking FDI rather than from the perspective of foreign firms seeking to invest in China. Applying the prevailing bargaining framework in studies on ownership structures of FDI projects, we find that a more liberal institutional environment for domestic private firms is associated with less foreign ownership of the joint ventures operating there. Several mechanisms can contribute to this outcome. One is that a more liberal institutional environment may enhance the bargaining power of those domestic firms negotiating with foreign firms to form alliances (the capability effect). The other mechanism is that a more liberal institutional environment may reduce some of the auxiliary benefits associated with FDI - such as greater property rights granted to foreign investors - and thereby attenuate incentive to form alliances with foreign firms (the incentive effect).

China, FDI, private sector, institutional environment, joint venture

Abstract:
Jiangsu and Zhejiang are of two of China most prosperous and dynamic provinces. This paper first presents a factual account of two empirical phenomena: 1) FDI has played a more substantial role in the economic development of Jiangsu than in Zhejiang, and 2) ownership biases against domestic private firms in Jiangsu were more substantial than in Zhejiang. The paper hypothesizes that there is a connection between these two empirical phenomena. Specifically, ownership biases against domestic private firms increase preferences for FDI because FDI provides a measure of relative property rights security. Thus a biased domestic private firm has an incentive to move its assets and/or future growth opportunities to the foreign sector. The paper uses two private-sector surveys - one conducted in 1993 and the other in 2002 - to provide an empirical test of this hypothesis. Our analysis shows, controlling for a variety of firm-level attributes and industry and regional characteristics, those private firms which perceive ownership biases to be more severe are more likely to form joint ventures with foreign firms.

Ownership Biases, FDI, China

Abstract:
This paper is the fourth chapter of a forthcoming book, Capitalism with Chinese Characteristics (New York: Cambridge University Press, July 2008). The book is a narrative account of the evolution of capitalism in China in the last three decades. (The year 2008 marks the 30th anniversary of economic reforms in China.) The research is based on detailed archival examinations of policy, bureaucratic and bank documents as well as several waves of household and private-sector firm surveys. As an example, I have examined a 22-volume collection of memoranda, directives, operating manuals, rules of personnel evaluations issued by the presidents of China's central bank, all the major commercial banks, rural credit cooperatives, etc. A detailed synopsis of the book appears after this page.

This book devotes an entire chapter to Shanghai, for two reasons. One is that Shanghai represents the classic urban-bias model - the city restricted the development of small-scale, entrepreneurial businesses while conferring tax benefits on FDI and on businesses closely allied with the government. The other is that at the end of the 1980s, Shanghai was among the least reformed of the urban economies in China and yet its leaders during the second half of the 1980s went on to dominate Chinese politics during the entire decade of the 1990s. This book asks, "What is wrong with Shanghai?" and proceeds to present the following illustrations:

- Although they are located in the richest market in China, indigenous private-sector businesses in Shanghai are among the smallest in the country and self-employment business income per capita is about the same in Shanghai as it is in provinces such as Yunnan, where GDP per capita is about 10 to 15 percent of that in Shanghai;

- (As an illustration of how unusual the above pattern is, imagine finding that selfemployment business income per capita in the United States were about the same as that in Turkey);

- The political, regulatory, and financial restrictions on indigenous private entrepreneurship in Shanghai were extreme as evidenced by the fact that the fixed asset investments by the indigenous private-sector firms peaked in 1985;

- The share of labor income - inclusive of proprietor income - to GDP is very low in Shanghai;

- Shanghai's GDP increased massively relative to the national mean but the household income level relative to the national mean experienced almost no growth;

- Although wage income is high in Shanghai, asset income is among the lowest in the country;

- Since 2000, the poorest segment of Shanghai's population has lost income absolutely during a period of double-digit economic growth;

- Although aspiring to be a high-tech hub of China, the number of annual patent grants in Shanghai decreased substantially relative to that in the more entrepreneurial provinces such as Zhejiang and Guangdong in the 1990s;

- Shanghai is also very corrupt.

regional economy, China, FDI, entrepreneurship

Abstract:
Using a comprehensive sample of all FDI firms in China, we explore the question whether ethnicity enhances operating performance. While there has been a sizable theoretical literature studying ethnicity and foreign investments, the prediction of the impact of ethnicity on firm profitability is far from clear. We demonstrate empirically that ethnic firms do not command an operational advantage over non-ethnic firms in the overall sample. Further tests suggest that while ethnic firms command an operational advantage over nonethnic firms initially, such advantage declines over time. We then explore what might have caused the decline of the ethnic advantage, and our results suggest that lack of investment in intangible and human capital by ethnic firms is driving the pattern we observe. Overall, our results suggest that ethnicity does not pay or that ethnicity does not confer a permanent operating advantage on a firm.

China, FDI, ethnicity

Abstract:
Using the data from World Business Environment Survey (WBES) on over 10,000 firms across eighty one countries, this paper finds preliminary evidence that foreign firms enjoy significant regulatory advantages - as perceived by the firms themselves - over domestic firms. The findings on regulatory advantages of foreign firms hold with a variety of alternative measures of regulations and with or without firm- and country-level attributes and industry and country controls. There is also evidence that foreign firms' regulatory advantages are especially substantial vis-a-vis the politically weak domestic firms. Furthermore, the regulatory advantages of foreign firms appear stronger in corrupt countries than in non-corrupt countries.

Foreign Firms, Regulatory Advantages, World Business Environment Survey

Abstract:
Using a unique census dataset on all industrial firms (with more than 5 million yuan in sales), we document a phenomenon of missing entrepreneurship in Shanghai. Entrepreneurship is defined as private, new entrants in our paper. Specifically, in terms of business density, the size of employment and a host of other measures, the relative ranking of Shanghai was always near the bottom in the country. All these empirical findings took place against a backdrop of the presumably huge locational advantages of Shanghai - the substantial human capital, rapid GDP growth, and a long and stellar - but pre-communist - history of entrepreneurship. We propose a hypothesis that Shanghai adopted a particularly rigorous version of industrial policy model of economic development and this industrial policy proclivity may have led to the atrophy of entrepreneurship in Shanghai.

Shanghai, Entrepreneurship

Abstract:
Using a large firm-level panel dataset from the Chinese National Bureau of Statistics, we examine the effect of financial distortions on FDI inflows in China's labor-intensive industries. Following Whited and Wu (2006), we estimate the investment Euler equation and construct a financing constraint index for each firm. We find that among domestic firms, the financing constraint index is highest for private firms and lowest for state-owned firms. This finding is consistent with the political pecking order hypothesis that states that there is a severe lending bias in China's financial system against private firms in favor of state-owned enterprises. Then we estimate a probit model of joint-venture decisions by private firms. We show that firms with greater financing constraints are more likely to be acquired and controlled by foreign firms. We interpret this evidence to be consistent with the fire-sale hypothesis that states that private firms relinquish their equity and control to foreign investors in order to raise financing for growth. We find that those firms in the top 25 percent of the most financing constraints could have avoided losing 31.5 percent of the equity share to foreigners had they faced the same favorable financing constraints as a typical firm in Zhejiang Province.

FDI, China, Fire Sale

Abstract:
No abstract available.

Abstract:
The fact that China is the second largest recipient of FDI in the world has been heralded by economists and government officials alike as one of the crowning achievements of Chinese economy. This paper questions this perspective. The paper focuses on FDI from ethnically Chinese economies (ECEs), which has financed China's labor-intensive industries and its export growth. First, the paper shows that the conventional wisdom about why China attracts so much labor-intensive FDI is flawed. Second, the paper offers what might be called an institutional foundation argument to explain the phenomenon of China's labor-intensive FDI. Labor-intensive FDI, according to this argument, is fundamentally driven by a political pecking order of firms in China that systematically disadvantages indigenous private firms both financially and legally. Labor-intensive FDI rises to alleviate the liquidity constraints afflicting Chinese private firms as efficient private entrepreneurs have no choice but to cede their claims on future cashflows to raise financing for their businesses.