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Privatizing Rural China: Insider Privatization, Innovative Contracts and the Performance of Township Enterprises

Published online by Cambridge University Press:  24 February 2004

Hongbin Li  and
Scott Rozelle
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Abstract

This article examines the privatization of China's township enterprises. According to our survey of 670 firms in 15 randomly selected counties in Jiangsu and Zhejiang provinces, more than half of the firms owned by local government were completely privatized by 1999. The privatization process is striking for two reasons. First, local governments almost always sold firms to insiders, while in the rest of the world privatization largely involves outsiders. Secondly, unlike the predictions of some academics and policy makers, many privatized firms have experienced an increase in performance. Drawing on firm-level survey data and extensive interviews with government leaders and managers, we found that leaders devised a way to elicit information from the buyer at the time of the sale about the firm's future profitability that enabled them to execute privatization successfully. Our analysis shows that the performance of firms with new owners that paid a price for the firm that exceeded the book value of its assets is on par with the performance of private firms after privatization since they also received strong incentives.

Type
Research Article
Information
The China Quarterly , Volume 176 , December 2003 , pp. 981 - 1005
Copyright
© The China Quarterly, 2003

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Footnotes

We would like to thank Loren Brandt, James Kung, Lawrence Lau, Albert Park and Minggao Shen for their valuable comments. We are indebted to the William Davidson Institute and the Ford Foundation in Beijing for funding the survey work in 1998 and 2000, and the Chinese University of Hong Kong for the Direct Grant for Hongbin Li. Scott Rozelle is a member of the Gianinni Foundation.