Pyramidal Ownership and SOE Innovation

Abstract

How can state‐owned enterprises (SOEs) become more innovative in emerging economies where market competition emerges and state socialism remains? Rooted in a state socialism logic that traditionally prioritizes central planning, SOEs are increasingly challenged by a market competition logic espousing efficiency and innovation. We posit that the challenge, stemming from the grip of the state as the ultimate owner, may be mitigated for some SOEs under pyramidal ownership. A pyramid features SOEs being organized into chains of firms, creating indirect ownership and control through pyramidal layers. Such layers insulate state intervention in lower‐tier SOEs, loosening the grip of the state socialism logic and facilitating corresponding SOEs’ acceptance of the market competition logic, as reflected in more innovation. Leveraging a sample of SOEs in China, we find that SOEs innovate more when the number of pyramidal layers between them and the state increases. In addition, the innovation‐facilitating role of pyramidal ownership hinges on industry regulations and institutional development. Overall, this paper integrates research on institutional logics and pyramidal ownership to deepen our understanding of SOE innovation.

Toward an institution-based paradigm

“…For example, Wang et al (2022) extend an institutional logics lens to delve into how state-owned enterprises (SOEs) leverage hybridity in order to become more innovative. Under the old state (socialism) logic, SOEs are neither interested in, nor capable of, innovating (Peng & Heath, 1996).…”

“…In other words, informal institutions that influence SOEs' strategic choices may gradually feature a coexistence of state and market logics (Peng, 2003;Raynard et al, 2020). The looser the grip of state logic, the easier the acceptance of market logic, and thus the more innovative such SOEs become (Wang et al, 2022). By contrast, some SOEs under the tight grip of a state logic may be institutionally constrained to innovate more.…”

“…SOEs with a low level of state ownership may be less constrained by a state logic, thus leaving room for a market logic that shapes their innovativeness (Zhou et al, 2017). Departing from this dominant research focus, Wang et al (2022) unveil a structural explanation by examining the ownership distance between the ultimate state owner and SOEs in China. Informed by the corporate pyramid literature (Almeida & Wolfenzon, 2006), Wang et al (2022) map ownership linkages between the state and SOEs, and turn the spotlight on state-owned pyramids-in which the state directly owns some SOEs, which in turn own other SOEs.…”

“…Departing from this dominant research focus, Wang et al (2022) unveil a structural explanation by examining the ownership distance between the ultimate state owner and SOEs in China. Informed by the corporate pyramid literature (Almeida & Wolfenzon, 2006), Wang et al (2022) map ownership linkages between the state and SOEs, and turn the spotlight on state-owned pyramids-in which the state directly owns some SOEs, which in turn own other SOEs. As a result, it is the indirect ownership by the state-specifically, pyramidal ownership-that explicates certain SOEs' incorporation of a market logic with the presence of a state logic.…”

“…In summary, an institution-based view of hybrid organizations can untangle the complex interactions between institutions and SOEs with innovation as an outcome (Wang et al, 2022). Such a focus, going beyond the primary attention paid to state ownership, innovatively probes the mechanisms underlying the relationship among institutions, organizations, and strategic choices (Peng, 2002;Peng & Heath, 1996).…”