We are the (National) Champions: Understanding the Mechanisms of State Capitalism in China

(with Curtis Milhaupt)  (forthcoming in Stanford Law Review) While China appears to present a new variety of capitalism, frequently labeled "state capitalism," the features of this system – particularly the organizational structure surrounding China’s most important state-owned enterprises (the national champions) – remains a black box. Corporate governance scholarship on China has focused on listed firms, but listed SOEs in China are nested in vertically integrated corporate groups, and the groups are strategically linked to other business groups, as well as to the Communist Party and to governmental organs. While the parent company of the listed firms has a governmental controlling shareholder in the form of an agency called SASAC, deconstruction of this agency’s control rights reveals that it has both less and more power than controlling shareholders in other regimes.  Unpacking the black box of Chinese state capitalism requires moving away from the standard focus on agency costs in listed firms that predominates in the corporate governance literature. Instead, we analyze the relational ecology that fosters production in a system where all roads eventually lead to the party-state. We introduce two analytical constructs to understand key features of industrial organization in China’s state-owned sector: "Networked hierarchy" is our term for the way top-down governance features within individual state-controlled corporate groups are matched with strategic linkages to other state-controlled institutions. "Institutional bridging" is our term for the widespread use of systematized fasteners uniting separate components of the system. We argue that networked hierarchies and institutional bridges have been used in China to assemble what Mancur Olson called an "encompassing organization" – a coalition whose members own so much of society that they have important incentives to be actively concerned about how productive it is. Exposing the mechanisms of state capitalism refocuses several scholarly debates in which China is conspicuous by its absence, including the law and finance literature and the debate over convergence in corporate governance systems. It also raises a question whose salience increases as the global interaction of Chinese firms expands: What forces have the potential to change the current institutional trajectory of corporate capitalism in China? Download Paper (SSRN)  Presentation Slides