Sonja Opper

Developmental State and Corporate Governance in China

Chinas state-guided economic miracle has revitalized a long-standing and unsettled debate about the role of government in transformative economic development. In a firm-level study of corporate governance we examine whether direct state involvement actually makes a positive contribution to the economic performance of newly incorporated firms in Chinas urban economy. We show that direct intervention into the governance of firms is likely to yield negative economic effects at the firm level. We infer from our findings that it must be other types of government intervention external to the firm that explain the success of Chinas developmental state in promoting rapid economic growth.

Entrepreneurs Under Uncertainty: An Economic Experiment in China

This study reports findings from the first large-scale experiment investigating whether entrepreneurs differ from other people in their willingness to expose themselves to various forms of uncertainty. A stratified random sample of 700 chief executive officers from the Yangzi delta region in China is compared to 200 control group members. Our findings suggest that in economic decisions, entrepreneurs are more willing to accept strategic uncertainty related to multilateral competition and trust. However, entrepreneurs do not differ from ordinary people when it comes to nonstrategic forms of uncertainty, such as risk and ambiguity. This paper was accepted by John List, behavioral economics.

Party power, market and private power: Chinese Communist Party persistence in China's listed companies

Abstract Structural changes of the elite have been a particular focus of sociological and economic research and debate since the outset of reforms in the post-communist transition countries. While most studies on elite changes focus on the relative income position as the indicator for the changing position of the old elite, we concentrate on the strength and pattern of decision-making power of Chinas old elite in newly emerging economic entities, such as listed companies. In line with the power persistence thesis, our analysis shows that the local party committees still succeed at keeping their fingers in the decision-making process even after two decades of economic transition, due to diverse lock-in effects between the party and various areas of the institutional environment. We hypothesize that the decision-making power of the local party committees is weakened by the emergence of market and private power during the economic reform and test our hypothesis by employing a survey conducted by the Shanghai Stock Exchange. This study supplements and broadens empirical evidence on the market-transition model and emphasizes the particular importance of a major private shareholder as the central constraint on the persistence of old elite in enterprise decision making.

Homophily in the Career mobility of China's Political Elite

We argue that leadership promotion in Chinas political elite relies on homophily for signals of trustworthiness and future cooperative behavior more than on economic performance. We first point to the limitation of the economic performance argument from within the framework of Chinas specific M-form state structure, and then we proffer a sociological explanation for why higher-level elites in China rely on homophilous associations in recruiting middle-level elites to the top positions of state. Using a unique dataset covering Chinas provincial leaders from 1979 to 2011, we develop a homophily index focusing on joint origin, joint education and joint work experience. We trace personal similarities in these respects between provincial leaders and members of Chinas supreme decision-making body, the Politbureaus Standing Committee. We then provide robust evidence confirming the persisting impact of homophilous associations on promotion patterns in post-reform China.

Bureaucracy and Financial Markets

Recent research on financial market development has focused on the nature of the legal system. The law and finance literature, however, exclusively focuses on the abuse of management power as a major cause of shareholder expropriation. We examine the role of the administrative capability of the state in providing and guaranteeing the institutional foundations for financial market development. The characteristic feature of bureaucracy is predictable, calculable and methodical performance. Our analysis of the linkage between bureaucratic quality and financial market development confirms our hypothesis that arms length finance not only needs a reliable legal environment, but also bureaucratic effectiveness (1) We provide evidence that state bureaucratic performance plays a crucial role in determining financial market development; (2) We find that legal origin plays an indirect role, as it affects the financial market development through the channel of the quality of state bureaucratic performance, but it does not exert a direct and independent effect. Copyright 2009 Blackwell Publishing Ltd.

Endogenous dynamics of institutional change

A parsimonious set of mechanisms explains how and under which conditions behavioral deviations build into cascades that reshape institutional frameworks from the bottom up, even if institutional innovations initially conflict with the legally codified rules of the game. Specifically, we argue that this type of endogenous institutional change emerges from an interplay between three factors: the utility gain agents associate with decoupling from institutional equilibria, positive externalities derived from similar decoupling among one’s neighbors, and accommodation by state actors. Where endogenous institutional change driven by societal action is sufficiently robust, it can induce political actors to accommodate and eventually to legitimize institutional innovations from below. We provide empirical illustrations of our theory in two disparate institutional contexts—the rise of private manufacturing in the Yangzi delta region of China since 1978, focusing on two municipalities in that region, and the diffusion of gay bars in San Francisco in the 1960s and 1970s. We validate our theory with an agent-based simulation.

Enforcement of China's Accounting Standards: Reflections on Systemic Problems

The key objective of this paper is to highlight the interconnectedness between Chinas political and economic system and its weak enforcement of accounting and auditing standards. The institutional analysis shows that the prevailing political and economic priorities constituting Chinas socialist market economy create a framework, that basically relies on state-led enforcement with weak supplementary private safeguard mechanisms. The resulting policy-mix is characterized by a mismatch of incentives and available devices to effectively enhance enforcement. While the state bureaucracy has little incentive to effectively fight financial misreporting because of both blurred policyeconomy boundaries and the coexistence of multiple and even non-economic goals, shareholders and creditors do not have sufficient and effective private safeguard mechanisms at hand. Findings lead to the conclusion that Chinas recent harmonization move of accounting and auditing standards urgently needs to be backed up by stronger efforts to create effective enforcement mechanisms. Sound reforms would have to center on a rigorous upgrading and restructuring of the responsible bodies supervising auditing quality and financial disclosure. Parallel to these measures, the increasing integration into the global economy may provide incentives and competitive pressure to comply with globally accepted standards.

Dual-Track Ownership Reforms: Lessons From Structural Change in China, 1978-1997

The dual-track approach is characteristic of evolutionary reforms in China. The most important aspect of this dualism has been the reform of the ownership structure. On the one track, new, basically market-oriented institutions emerged in a parallel economy comprising non-state enterprises. On the other track, stateowned enterprises were retained and reforms were restricted to conservative policy changes bringing minor productivity-enhancing measures. In order to highlight the performance of the two tracks, a widely neglected indicator is employed to check the performance of enterprises: namely a structural comparison of the resource reallocation processes of both tracks over time. It becomes clear that structural adjustment was basically generated by the new track. In addition, it is shown that the increasing competition from the new track will not accelerate structural adjustment of the old track as long as institutional reforms of SOEs are not significantly extended.

Bringing Market Transition Theory to the Firm

Market transition theory has specified general mechanisms to explain change in the balance of power between political and economic actors in transition economies. These mechanisms drive the endogenous construction of informal institutions of a market society; moreover, it is within the context of an ongoing change in relative power that the formal institutions of the emerging market economy arise. The theory makes clear predictions on the declining value of political capital as a consequence of progressive marketization, which incrementally results in transformative change in the direction of more relative autonomy between the political and economic spheres, not dissimilar from established market economies (Kornai, 1995; Evans, 1995; Nee, 2000; Lindenberg, 2000; Ricketts, 2000). In sum, the predicted change in relative power between redistributors and producers explains not only bottom-up entrepreneurial activity, but also the emergence of a market economy in departures from state socialism.

Endogenous Institutional Change and Dynamic Capitalism

State-centered theory asserts that political institutions and credible commitment by political elite to formal rules securing property rights provides the necessary and sufficient conditions for economic growth to take place. In this approach, the evolution of institutions favorable to economic performance is a top-down process led by politicians who control the state. Hence, in less developed and poor countries, the counterfactual is that if formal institutions secure property rights and check predatory action by the political elite, then sustained economic growth would follow. The limitation of state-centered theory stems from the problem that behavioral prescriptions - formal rules and regulations - that reflect what politicians prefer can be ignored. In contrast, we lay out the bottomup construction of economic institutions that gave rise to capitalist economic development in China. Entrepreneurship in the economically developed regions of the coastal provinces was not fueled by exogenous institutional changes. When the first entrepreneurs decided to decouple from the traditional socialist production system, the government had neither initiated financial reforms inviting a broader societal participation, nor had it provided property rights protection or transparent rules specifying company registration and liabilities. Instead, it was the development and use of innovative informal arrangements within close-knit groups of like-minded actors that provided the necessary funding and reliable business norms. This allowed the first wave of entrepreneurs to survive outside of the state-owned manufacturing system. This bottom-up process resembles earlier accounts of the rise of capitalism in the West. Secondo la teoria stato-centrica, sono le istituzioni politiche e un impegno credibile dell’elite politica per regole formali che garantiscano i diritti di proprieta a costituire la condizione necessaria e sufficiente perche si produca crescita economica. Secondo tale approccio lo sviluppo di istituzioni che favoriscano il successo economico e un processo che si sviluppa dall’alto, guidato dai politici che controllano lo stato. Pertanto, nei paesi meno sviluppati e poveri basterebbe ci fossero istituzioni formali a garantire i diritti di proprieta e tener sotto controllo le pratiche predatorie dell’elite politica per ottenere crescita economica sostenuta. Il limite della teoria stato-centrica sta nel fatto che le prescrizioni operative - regole e regolamenti formali - che riflettono le preferenze dei politici possono essere ignorate. Al contrario, noi descriviamo come si siano costruite dal basso le istituzioni economiche che hanno dato vita allo sviluppo capitalistico in Cina. Lo sviluppo dell’impresa privata nelle regioni economicamente sviluppate delle province costiere non e stato alimentato da cambiamenti istituzionali esogeni. Quando i primi imprenditori decisero di staccarsi dal tradizionale sistema di produzione socialista, il governo non aveva ne avviato riforme finanziarie volte a favorire una piu ampia partecipazione societaria, ne fornito protezione dei diritti di proprieta o regole trasparenti sulla registrazione e la responsabilita delle imprese. Invece, fu lo sviluppo e l’utilizzo di intese informali innovative tra gruppi coesi di attori con orientamenti comuni a far emergere i finanziamenti necessari e norme commerciali affidabili. Questo permise alla prima ondata di imprenditori di sopravvivere al di fuori del sistema manifatturiero dello stato. Questo processo di mutamento dal basso somiglia a precedenti descrizioni della nascita del capitalismo in Occidente.