Liu & Liu: Path Dependence and Path Breaking in Chinese State-owned Enterprise

Abstract:

Based on the theory of path dependence, this paper first reviews the reform process of Chinese enterprise and testifies that the evolution of Chinese State-owned Enterprise is path dependent, and then proposes some solutions for breaking up the path dependence in Chinese SOEs.

Path dependence means that where we are now is only a result of what has happened in the  past. In economics, path dependence means that equilibrium allocations depend on history (Liebowitz and Margolis, 1995). State-owned enterprises (SOEs) are enterprises which are  invested and controlled by the state. SOEs exist in various countries due to the comprehensive effect of many factors, such as market failure, regulatory defects, social objectives, etc.

The issue of path dependence in Chinese state-owned enterprises (SOEs) emerges with the reform of economic system in 1979. Before 1979, China was a centrally planned economy. The public authorities controlled all enterprises and whole national economy through rigid mandatory planning. While market was extremely limited and competition was regarded as immorality and illegality. In another word, enterprises were only subordinates of government administration at any levels. In 1979, China determined to enforce reform and open policy. Since then, the  transformation from planed economy to market economy has started.

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