Chinese Corporate Balkanization: The Reality of Political Economy and Competition for Corporate Charters as a Replacement

Abstract

In the area of business law, legislatures always lack incentives to enact optimal laws and are reluctant to innovate even if innovation is badly needed in the real business world. This reluctance exists because lawmakers share few of the benefits of producing optimal laws. Competition among states for corporate charters is the genius of American corporate law. This competition has proved to be an effective way to improve the responsiveness of corporate law. In contrast, the EU and Canada have run into bottlenecks when trying to introduce charters competition. Due to a lack of specific legal expertise in corporate law, Chinese local governments often find themselves with enormous discretion in regulating the local market. Driven by political ambitions, bureaucrats are eager to use any means available to raise local GDP. These methods include some that contradict the policy of the central government and have negative effects on the local community. These practices invite a “race to the bottom” situation and create symbiosis between management and bureaucrats, increasing the likelihood of corruption. These problems of racing to the bottom can be solved by actions of the central government. Meanwhile, thru introducing charters competition, local lawmakers still can compete and the competition under legal frame will be “race to the top” competition. Given the specific political and economic realities of China, the problems preventing the EU and Canada from adopting charters competition will not haunt China Through proper legal arrangement, local provinces may have a chance to promulgate their own corporate laws, even if the corporate law-making power remains in the hands of the national legislature.