Twofish's Blog

July 26, 2006

The Dolphin Problem on Chinese Enterprises

Filed under: china, finance — twofish @ 8:30 pm

I’m trying figure out what to call the difference in management styles between the TVE’s and SOE’s. Traditionally in the management literature, these have been divided into the terms “privately managed” and “state managed.” The big problem with these is the “dolphin problem” just because it looks like a fish and swims like a fish, doesn’t mean that it is a fish, and if you call dophins “fishes” rather than “aquatic animals” you are missing something important.

Similarly, just because a TVE or collective enterprise is managed like a private company, doesn’t make it a private or semi-private company. Legally and from a financing point of view, a TVE or collective expertises is ever bit as “public” as an “SOE.”

However it is clear that there *is* a need for some terms that distinguish how an old SOE is managed from how a TVE is managed. Dolphins aren’t fishes, but we need a term similar to “land animal” and “aquatic animal” so that we can talk about these things.

The two categories which I think can distinguish between what is called “private” and “public” is “profit seeking” and “inputs seeking.” A “profit seeking” firm attempts to maximize profit and will do so by cutting losses and increasing efficiency. A “inputs seeking” firm attempts to maximize resource inputs it doesn’t care about the value of the output.  Most government agencies in fact are “inputs seeking.”  Because their outputs are often not measurable, there is no metric to determine the behavior of the firm other than maximizing inputs.

The methodological issue that one should consider is that a “publicly-owned” firm can be “profit seeking” while a “privated-owned” firm can be “inputs seeking.”

One other interesting implication of Chinese firms. There seems to be a consensus in China that “public” Chinese firms and “private” Chinese firms ought to compete on an equal basis. One of the interesting implications of this policy is that if “public” and “private” firms are evaluated the same way and ownership is unimportant but management is, then there is no reason not to have “mixed” firms which have mixtures of public and private capital.


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