Market Reforms, Technological Capabilities and the Performance of Small Enterprises in China

During the past 20 years, China has maintained a high economic growth rate that has attracted worldwide attention. Small enterprises have contributed the lion’s share to this achievement. In 1995, small enterprises accounted for 62.5 percent of China’s total industrial output and 73.6 percent of its industrial employment. While most largeand medium-size enterprises are still owned by the state, China’s small enterprises are overwhelmingly private. In 1995, 78.5 percent of all the small enterprises were private, and their share of the national industrial output amounted to 36.1 percent. This feature has made small enterprises the most vibrant element in the national economy. The causes for the success of China’s small enterprises are several. First, the success has been made possible by general economic reforms that have released China’s economic energy and are gradually accelerating it to its full throttle. Second, the success has been stimulated by the huge market for basic consumer goods that was not targeted by the planned economy before the reforms took place. Third, the newly established small enterprises are agile in responding to market signals, emerging and vanishing constantly, avoiding the fate of the state firms that are plagued by redundant employees and nonperforming capital. Last, rural communities and local governments have played a significant role in helping the development of small enterprises at the township and village level. However, China’s small enterprises have also raised incomes. While it is widely acknowledged that small enterprises, especially those in the countryside, the so-called township and village enterprises (TVEs) have played an important role in creating employment, fulfilling market needs, and increasing competition, some scholars and government agencies have noted that they are wasting precious resources because of their technical incompetence. For example, a report issued by the State Council in 1990 stated: “Compared with large and medium enterprises, their (small enterprises’) technology is backward, their consumption of materials and energy is high, and their product quality is low . . . . They compete with large and medium enterprises for materials, energy, capital, and markets, making large and medium enterprises not able to fully utilize their production and technical potentials. From a social point of view, this trend of “smallization” and diversification will inevitably aggravate the inefficiency in industrial production.” (Industrial Census Office of the State Council and Institute of Economic State Planning Commission 1990). Other people blame small enterprises for the sluggish growth of large enterprises and the technology intensive sectors, and call the flow of capital to small enterprises the “adverse allocation” of resources (Yin 1997). While these criticisms are warranted to the