Promoting Private Entrepreneurship for Deepening Market Reform in China: A Resource Allocation Perspective

• Author: Son Ngoc Chu,Ligang Song
• Published date: 01 January 2015
• DOI: http://doi.org/10.1111/cwe.12099
• Date: 01 January 2015

47

China & World Economy / 47–77, Vol. 23, No. 1, 2015

©2015 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Promoting Private Entrepreneurship for Deepening

Market Reform in China: A Resource

Allocation Perspective

Son Ngoc Chu, Ligang Song*

Abstract

After more than three decades of rapid growth, China’s economy is going through an

important turning point, where structural imbalances in both supply and demand sides must

be addressed for a more moderate and sustainable growth path. By focusing on the structural

changes to its ownership, a central element in China’s economic transformation under

market reform, the present paper highlights the importance of private entrepreneurship in

deepening market reform and, thereby, in driving economic growth in a more efficient and

sustainable way. Based on a perspective of resource allocation and a conceptual framework

of entrepreneurship, the paper elaborates on the evolution of the private sector and its

performance in the context of ownership reform, making comparisons with the performance

of the state sector. The analysis suggests that there is further room for more productive use

of economic resources, especially capital, land and natural resources, by increasing the

participation of private entrepreneurs in industries with high entry barriers in favor of

state-owned enterprises. Moreover, more competitive and equal access to productive

resources through reform is needed to promote more productive entrepreneurship and to

reduce rent-seeking activities.

Key words: entrepreneurship, market reform, private enterprises, resource allocation, rent-

seeking, state-owned enterprise, total factor productivity

JEL codes: D02, O12, O43, P16

I. Introduction

Over the past three decades, market-oriented reforms in China have resulted in spectacular

*Son Ngoc Chu, Crawford School of Public Policy, Australian National University, Canberra. Email:

son.chu@anu.edu.au; Ligang Song (corresponding author), Crawford School of Public Policy, Australian

National University, Canberra. Email: ligang.song@anu.edu.au.

48 Son Ngoc Chu, Ligang Song / 47–77, Vol. 23, No. 1, 2015

©2015 Institute of World Economics and Politics, Chinese Academy of Social Sciences

economic performance. Transforming the enterprise sector has been central to the market

reform process. Entrepreneurship has emerged and expanded rapidly, with entrepreneurs

making increasing contributions to economic growth and structural transformation in China.

Despite the rapid expansion of the private sector in the economy, state-led resource

allocation has been an important part of China’s economic reform strategy, having exerted

substantial effects on the survival of state-owned enterprises (SOEs) and the evolution of

private enterprises. Focusing on capital, land, energy and utilities as key resources, we

examine how the state has changed and reformed the institutional systems governing the

supply and distribution of these resources during the market reform process. At the same

time, we investigate the extent of outcomes that enterprises of different ownership have

experienced with respect to access to these resources and the policy implications. Firm

behavior and responses are examined in the sectoral and ownership patterns of investment

activities, asset and output shares, and profit and productivity performance. This approach

is used to shed light on the puzzle of China’s rapid economic growth with an expansion of

the private sector accompanied by the existence and the predominant role played by SOEs

in some of the key sectors in the economy, such as oil, petrochemicals, aviation, steel, coal,

finance, telecommunications and railway.

State control of the development of capital, land and resource markets has, in general,

created substantial rents that have been directed to important infrastructure projects and

provision of public goods, thereby facilitating economic transition and contributing to

rapid economic growth. At the same time, such rents have also produced side effects due

to the state control of resources, including rent-seeking activities by both governments

and enterprises. The misallocation of resources has been linked to structural imbalances,

such as overcapacity in certain sectors, and significant negative impacts on the development

of private entrepreneurship, which holds the key to increasing the productivity and growth

potential of China (Deer and Song, 2012).

II. Economic Transition, State-controlled

Resources and Entrepreneurship

It has long been recognized that in a market economy entrepreneurship drives economic

growth through a “creative destruction” process, a term coined by Schumpeter in the early

20th century (Carree and Thurik, 2003). Development economics views entrepreneurship

as a driving force of economic growth and structural transformation (Gries and Naud é,

2008; Naudé, 2010). This view is particularly relevant for a country in the process of transition

from a centrally planned economy to a market-based economy. The connection between