Working Paper
The Evolutionary Dynamics of China's Small- and Medium- Sized enterprises in the 1990s

Since 1992 a series of radical and successful reforms of their ownership and governance structures have been conducted by China's small and medium enterprises (SMEs). Innovative arrangements such as 'joint-stock co-operatives', 'joint-stock partnerships', 'grafted joint ventures' and 'small corporatization' have been used. This new round of reform has affected SMEs in both the state and non-state sectors and in both urban and rural areas. Local governments play a significant role in this round of market-facilitating reform. Even in the state sector these reforms has been led by local governments, mainly counties and cities. Since the early 1970s local governments in China have gradually come to control all of the small- and a large proportion of the medium-sized state-owned enterprises (SOEs). The reform of these local SOEs has been a response to the present financial and business difficulties. On the other hand, the simultaneous ownership reform in the township and village enterprise (TVE) sector is an active response to potential or foreseeable future difficulties. The TVE growth miracle has in fact continued, producing 46.3 of total exports and more than 30 percent of GDP by 1997. Private and household-run enterprises have also experienced very rapid growth since the new reform era opened in 1992. Many of these firms have sub-contractor or other affiliated relationships with TVEs or locally controlled SOEs. Of the TVEs that have adopted the joint-stock co-operative form, most are 'closed co­-operatives' with shares that are not tradable by outsiders and local government as the only non-employee shareholder. Many purely private enterprises have been adopting this same form, again often bringing in local government as an equity holder. A complex and in some ways unpredictable 'mixed' system is emerging where 'public' ownership does not mean state ownership and where the term 'private' is commonly used to describe entities that have no conventional private owner. The Chinese experience indicates that it is desirable to adopt a pragmatic multi-track strategy of building market institutions, which requires active and sustained government policy engagement. The authorities must work to: (a) supply incentives which induce a market-learning evolution of the existing institutions; (b) develop market organizations and institutions in a way that combines new, market-oriented elements with the existing organizational and institutional capital; and (c) encourages and supports the coexistence of diverse organizational and managerial arrangements.