What defines a high-performance business? Fiscal and monetary policy, capital market characteristics and governance structure all have an impact but so too does the ownership model. Breaking firms down into state-owned organisations, private entities and those run by foreign stakeholders and seeing if these three ownership set-ups affect performance remains relatively unexplored territory. Investigation of the ever-growing Chinese manufacturing sector provides key insights, especially when the size, age and location of firms are factored into the equation.
How do we explain the differences in firm performance? Practitioners and researchers ask themselves this question when trying to gauge the impact of the characteristics of a firm and its environment on performance. One of the most significant factors to have emerged is the ownership models adopted, ranging from a purely public set-up owned by the state, to a 100% privately-run business and those run by foreign entities from another country. Owner type matters, but what hasn’t yet been established is a way of numerically measuring the impact of the three types of ownership model and the variables that can also affect performance for better or for worse.
Understanding the ownership matrix
Different owners look to pursue different interests - a state-run organisation may want to achieve a social purpose, an entirely private set-up may be more profit-oriented, whilst a business established in one country but run out of another may have to balance local and foreign concerns. In addition, governance-related constraints may differ from one type to another, access to external networks and resources may not be the same, and resources and supplier-customer contracts will not always be similarly allocated. All of this adds up to potentially major differences in performance from one set-up to another, hence the extra need to measure this effect numerically and independently via a comprehensive dataset, in this instance that of the Chinese manufacturing sector.
China is an especially rich area for investigation, due to the particularly high growth in comparison to most emerging economies. The size of Chinese businesses, the resultant labour market and consumer base, and the geographical vastness of the country also make it fertile territory for examining the link between ownership types and performance results. Better still, the Chinese manufacturing sector is characterised by high ownership type variance, in cross section, over time and by region, and is highly representative of the decentralisation of state control to provincial levels of administration. For this last reason in particular, analysis of the Chinese case may point the way forward for analysing emerging markets experiencing rapid growth such as Brazil, India and Russia.
A deductive and impactive empirical study
The study in question focusses on the period 1998-2007 (marked by 8-10% national growth per year), on manufacturing businesses with annual sales in excess of 5 million RMB, and across 31 regions in mainland China. The criteria applied via the National Bureau of Statistics of China produced over 330 000 firms and covers an extended period which has seen the country move further and further away from state control to include far more privately-owned firms, a trend that began back in the late 70s. In addition, the Chinese economy is marked by an intense concentration of business activity in certain cities and areas (notably the likes of Beijing and Shanghai) and firms of varying size and age, hence the importance of seeing the extent to which such factors produce more variable performance results per ownership model.
Calculating the cost from all angles
Where the recent study really advances the debate is in assessing numerically the importance of owner type upon performance across the three ownership models. Whilst the overall best option for businesses (state, private or foreign-owned) is still under investigation, what emerges very clearly is the possibility the analysis offers to characterise the importance of owner types in numbers for the very first time. Firm size emerges as having a relatively small impact on performance. On the other hand, owner type not only has a direct consequence (with the increasingly present private set-up the way forward) but the regional location and age of the firms under analysis increases further the variance of performance results.
Prior to this neutral study it could already be said with confidence that owner type mattered but not by how much. What has now become clear is not only the already-established impact of owner type and its percentage impact (positive or negative) on a firm’s performance but also the effect that such variables as firm size, age and location can have. When one considers the vastness and diversity of a country like China and how useful applying this initial numerical measurement to similarly challenging markets such as Brazil, India and Russia, the potential opportunity to re-shape the business ownership map of such fertile territories becomes enormous.
This article draws inspiration from How much does owner type matter for firm performance?
Manufacturing firms in China 1998-2007, written by Xia Fan and Gordon Walker and published in The Strategic Management Journal 36 (2015).
Fan Xia is an Associate Professor of Strategy and Innovation at Rennes School of Business, France. His research interests include Firm Governance Structure and Institutions, Innovation, and Merger & Acquisitions.
Gordon Walker Department of Strategy and Entrepreneurship, Cox School of Business, Southern Methodist University, Dallas, Texas, U.S.A.