The Role of Firm Ownership in Transitional Economies: Recent Evidences from China

Abstract Marxists see firm ownership as an instrument for capitalists to exploit workers for “surplus value”. Neo-classical economists treat capital and labour equally as factors of production, which generate wages for workers and profits for capital owners. Both “Surplus value” and profits should be, and indeed are, on average, positive in typical market economies. This paper proposes a theory to explain the role of state ownership in the transitional economies such as in China. The theory predicts that state ownership would lead on average to net losses and liabilities for the state sector as a whole due to the tendency toward “privatisation” (or “private-taking”) of profits and assets and “socialisation” of losses and liabilities. The asymmetrical incentives in dealing with the assets and liabilities in the state-owned firms and banks can be traced back to the fact that the state as an owner of losses and liabilities would not go bankrupt unless it is overthrown politically. The paper then brings about aggregate and micro evidences to test the above theory. It constructs a consolidated balance sheet for China’s state sector to explain the extent and implications of its asset-liability imbalance. It also compares the performance and the asset-liability conditions among Chinese enterprises of different ownership using recent firm-level data from industrial surveys.