Why do Chinese local governments transfer their rights of control over SOEs to the central government?

Abstract

General rightsThis document is made available in accordance with publisher policies. Please cite only the published version using the reference above. Why do Chinese local governments transfer their rights of control over SOEs to the central government? AbstractThis paper investigates local authorities' motives for transferring their rights of control over state-owned enterprises (SOEs) to the central government. Using a difference-in-difference approach, we find that both employment and investment improves significantly following such transfers, and these findings are more pronounced among firms located in regions where the political pressure on local officials is higher. However, we fail to find any significant improvement in profitability. Our findings suggest that local governments tend to alleviate the political pressure they face by giving up their control rights and even sacrifice long-term economic benefits to do so.

Unlocking the myths of size expansion in China's large state‐owned enterprises: Theory and evidence

“…Our paper stands at the intersection of two streams of literature. The first strand touches upon the notions of how the resurgence of China's state sectors over the past decade is driven by macro‐level factors of the dynamics of its economy, including political, fiscal, financial, and industrial dimensions (Cai et al, 2015; Feng et al, 2018; Huang et al, 2021; Li, 2020; Liu et al, 2022). For instance, Cai et al (2015) note for those local authorities in China who face strong political pressures from the top that they are more inclined to transfer the control rights of local SOEs to the central government so as to raise the investment and employment levels of their managed regions.…”

“…The first strand touches upon the notions of how the resurgence of China's state sectors over the past decade is driven by macro‐level factors of the dynamics of its economy, including political, fiscal, financial, and industrial dimensions (Cai et al, 2015; Feng et al, 2018; Huang et al, 2021; Li, 2020; Liu et al, 2022). For instance, Cai et al (2015) note for those local authorities in China who face strong political pressures from the top that they are more inclined to transfer the control rights of local SOEs to the central government so as to raise the investment and employment levels of their managed regions. Our paper partially agrees with such views but enriches such political incentive logic by endogenizing such control right transferring choices by looking at how both the local and central authorities could derive more benefits via higher taxation arising from more investment during the process of asset size expansions of China's large SOEs.…”

“…Our paper stands at the intersection of two streams of literature. The first strand touches upon the notions of how the resurgence of China's state sectors over the past decade is driven by macro-level factors of the dynamics of its economy, including political, fiscal, financial, and industrial dimensions (Cai et al, 2015;Feng et al, 2018;Huang et al, 2021;Li, 2020;Liu et al, 2022). For instance, Cai et al Second, our paper enriches the insights into why such asset expansions are not only a result of unilateral initiative taken by the state but also a product of which large SOE managers could derive higher a degree of private control rights through the asset size expansions of their SOEs.…”