Rethinking China's Reform of Corporate Governance: A Perspective of Path Dependence

Abstract

Discussion of corporate governance is increasingly prevalent in an era of globalisation and a hyper-competition. China’s corporate governance system is inevitably affected by these theories. This article uses path-dependence theory, to answer a neglected question of China’s legal reform of corporate governance: why does this reform follow the approach of legal transplantation, despite the many problems caused by that approach. China’s corporate governance shows two path-dependence characteristics, in that it is ‘starting sensitive’ and ‘efficiency driven’. The latter includes sunk costs, learning effects, and network effects. These characteristics show that China’s corporate governance has developed an intrinsic order system based on the path of transplantation. The causes of this include not only an eagerness to enhance the local competitiveness of the corporate governance model but also a large number of hidden factors. Any attempt to alter the resulting equilibrium is likely to lack efficiency.