“The success of most firms and enterprises is based on clear lines of ownership of the firm and its assets. The secret of success of China’s Town and Village Enterprises (TVEs), was that no-one knew exactly who owned the firm and its assets.” This statement is both true and false depending on how it is argued. First of all, it is not absolutely true to say that the success of most firms and enterprises is based on the clear lines of who owns the firm and its assets. There are firms which have thrived well regardless of the fact that it's not clear who owns them and their assets. The China’s TVEs was one of them. On the other hand, contemporary studies show that for a firm or enterprise to be successful, there should be clear details of who owns the firm as well as its assets. However, the case of the China’s TVEs is not good enough to disapprove these studies. It is therefore rational to conclude that indeed the success of most firms and enterprise is determined by the ownership of the firm and assets (Kung & Lin 2007, pg. 12).
Public and state owned firms and enterprises are known to be poorly managed due to lack of competition will. On the other hand, privately owned firms and enterprises are known to be well managed due to their desire to maximize profits and their competitive will. Therefore, when a firm or enterprise is privately owned, the owners will work hard to ensure that they get good returns from their investments. In most cases, private firms and enterprises are far much more successful than public and state owned firms. The public and communal firms normally concentrate on employment and not optimization of returns. They are less innovative and competitive. They normally take more time to respond to the market trends and the management structure is normally lengthy and inefficient. In most cases those in charge of state owned firms and enterprises misuse resources and lack proper management skills (Liao, 1995), pg. 13).
The background of China’s Township and Village Enterprises (TVEs)
The term Town and Village Enterprises TVE were officially used in the People’s Republic of China in 1984 to refer to the firms and enterprises that were under the local governments based in villages and townships. These firms were very crucial to the economy of China. The TVEs initial role was production of industrial products to be used in the agricultural practices in the rural parts of China. The major products that TVEs firms and enterprise produced included cement, iron, steel, fertilizer, farm tools and hydroelectric power. Research shows that by 1984 the number of TVEs was very little but it increased rapidly in 1980s during the reform period in China. In the year 1985 the number of TVEs had raised to 12million compared to the 1.5 million in the 1978. This clearly shows that TVEs were successful in China and they really contributed greatly to the country’s economic growth (Naughton, 2007, pg. 19).
According researchers and scholars concerned about the Asia business, the success and growth of TVEs were due to the fact that there was no clear information about who owned them. First of all, it is worth noting that TVEs referred to the locations where the firms and enterprises were situated. This means that the TVEs represented all the companies and firms located in the townships and villages and not only those owned by the public. According to the report documented by the Chinese Ministry of Agriculture in 1984, the TVEs included all the firms and enterprises owned by the townships and villages as well as those sponsored by townships and villages. This includes private enterprises that were under the regulation of villages and the local authority (Jefferson, Rawski & Zheng 1992a, pg. 34).
This mixture of TVEs in China made it difficult to tell who exactly owned every firm and its assets. Consequently it was difficult to differentiate privately and publicly owned firms within the TVEs. Those responsible for the management of these firms did not have room to misuse resources as it is with most of the public firms and enterprises. However, research shows that most of the TVEs were collectively owned by locals and townships which sponsored them. Most of the firms and enterprises were established by the government and township authorities but the actual ownership was left in the hands of individual members of the community. The ultimate ownership of the TVEs remained collectivized while the use rights were left in the hands of the managers in a collective manner. Generally, there was no true system of ownership in TVEs and this made it essential to adopt the village and township title (Park & Shen, 2003, pg. 23).
It is worth noting that a thorough study on the structure and ownership of TVEs shows that it's known who owned the firms and enterprises. The success of the China’s TVEs was not because their ownership was not known. Research shows that during that time the political institutional environment in China favored the TVEs before and during the first years of the reform. During this era, the Chinese government imposed strict restrictions and discrimination in private business. The government through the local authorities set harsh regulations to ensure that private businesses could not thrive. The national resources were distributed only to the public firms and enterprises and this made it difficult for private businesses and foreign firms to thrive in China (Jefferson, Rawski & Zheng 1992b, pg. 14).
There was also the 1980s fiscal decentralization that made the local governments and villages more powerful in terms of resource distribution. The local authority officials were also offered good packages and this made them to promote public firms and enterprises especially the TVEs. With only TVEs firms and enterprises operating in the most of the rural parts of China, the demand for the products of TVEs was definitely high and this led to their success. According to a report by a group of scholars from China, TVEs enjoyed ample profit making opportunities that enabled them to thrive well. They also enjoyed cheap loans from the state banks that boosted their both formations and working capital (Jefferson, 1994, pg. 47).
The collapse of TVEs
The townships and villages that assumed ownership of the China’s TVEs misused the resources and rights. This turned these firms and enterprise to local authority's properties thereby interfering with the initial flexible organizational and ownership structure. The study shows that with time most of the TVEs were converted from collectively owned enterprises to independent firms and state firms. This led to the fall of TVEs between 1989 and 1996. This was as a result of the true ownership structure between state-owned firms and those that were under private ownership (Liu, 1997 pg. 19),
Research shows that the China’s TVEs downfall started in 1995 and 1996 during the administration of Jiang Zemin. The TVEs faced hostility from both the government and citizens and most of of the firms and enterprises were forced to close down. During the time of Jiang, Zemin’s administration over 30% TVEs became bankrupt due to lack of the support from the government. Even at this time the ownership of TVEs was not clear to many. It is therefore evident that TVEs did not succeed because no one knew their owners but because they enjoyed favors and financial support from the government and the local authorities. It is clear from the findings of the study that the ownership of TVEs was under the local governments, although there was hidden information that made the public to feel like they owned their firms (Kung & Lin 2007, pg. 19).
The collapse of the China’s TVEs took place in the mid 1990s and most of the firms were forced to restructure themselves and become private organizations. The new regime in China in the 1990s allowed market integration competition that made it hard for TVEs to continue operating as monopolies. There was high discrimination against TVEs from the local government official in the mid 1990s, and this also led to the collapse of the TVEs. During the regime of Jiang, those in government favored foreign owned and private firms and enterprises. Consequently, TVEs lost their competitiveness. The idea of bringing to an end directional liberalism in China also created room for the local officials who had initially protected TVEs to start expropriating them. The discrimination against the TVEs by the local authorities became severe and it was even difficult for the firms to get loans that they needed to continue dominating the market (Saich, 2001. Pg.19).
The study shows that TVEs collapsed completely by the year 1996. From 1978 to 1995 they were very successful and served as the source of employment growth and economic boost to the people of China. However it is not clear what specific thing caused the fall of TVEs. Therefore it is not definitely accurate to say that after 1996 the ownership of TVEs was known and thus the reason for their fall. Nevertheless, after 1996 it is clear that there are several changes that happened in the governance structure of China that reduced the benefits enjoyed by TVEs thereby contributing to their fall. It is also noted that the structure of assets and ownership in these firms and enterprises was greatly affected after 1996 and this contributed to their failure. The privatization of most of the TVEs of the Chinese government changed the economic environment that favored them and they could no longer face stiff competition from private and foreign firms and enterprise (Harvie, 1999, pg. 34).
Increased competition competition for inputs is one of the major factors that contributed to the fall of the Chinese TVEs. After most of the firms and enterprises were privatized, they could no longer access state financing and consequently they lacked funds to finance their operations. This also decreased their ability to compete with private firms that were gaining popularity in the country. There was also a shortage of managers and skilled labor in the TVEs after the emergence of private firms and enterprises which paid their employees much better than the TVEs. This increased the cost of running the TVEs as they competed with foreign companies used to compete and with better strategies. The idea of restructuring TVEs also affected the remaining TVEs. The privatized TVEs became more secure and competitive and this made the TVEs to face more constraints in terms of budget as they tried to compete with the emerging private companies (Saich, 2001. Pg.11). The TVEs were also strained by their social responsibility to the Chinese people as they were obligated to meet the demands of the people alongside making profits. On the other hand the private company's core goal was to make good returns.
Analysis of the success of the China TVEs
The initial thesis of the paper was that the success of most of the firms and enterprises is determined by the ownership of the firm as well as its assets. However, the phrase becomes complicated since TVEs are known to have been successful simply because their ownership was not known . However, the study shows that indeed the ownership of the TVEs was at a communal level and there were no individual shareholders. Generally, the TVEs can therefore be concluded to be owned by the community through the management of the local governments and villages. The households were required to give their contributions to the TVEs in order to maintain their village and township rights. It is therefore clear that the ownership of the TVEs was known and well protected as people were not allowed to move to the urban areas to work there. By doing so they could lose their ownership rights. This indirectly made people to work hard for the success of TVEs (Demsetz 1967, pg 5).
Another factor that led to the success of TVEs is the fact that profits remained in the society. They were either reinvested to the TVEs or used to fund the social amenities such as schools , parks and housing projects. Again this shows that the ownership of the TVEs was in the hands of the community. They were the key beneficiaries of the firms and this made the society to put more effort towards their success. This also discouraged embezzlement of funds among the managers of TVEs. The fact that TVEs could obtain state loans from the local authorities unlike the private firms shows clearly that they were partly partly owned by the state. The success of TVEs was because the government restricted its ownership through the townships and villages (Saich, 2001. Pg.17). Additionally, TVEs operations were fully supported by the Chinese government unlike the privately owned enterprises. They therefore faced lower risks that the community ownership rights would be taken away from them in future. This led to success of the TVEs until when rights were taken from the community owners resulting in the collapse of the firms and enterprises. On the other hard, the rights of the privately owned firms were secure under the governance that existed in China during that time. This made investors to fear entrusting their money with private firms thereby putting the TVEs at an advantage. It is also worth noting that TVEs normally ventured in sectors that required more labor thereby attracting a lot of manpower since unemployment was a major challenge in China. This made it easier for the TVEs to get cheap labor thereby cutting down their expenses. The saved money was then included in the profits of the firms and this made to appear successful (Byrd & Lin 1990, pg 9)
Generally, the success of China TVEs was not as a result of the fact that their ownership was not known. The study shows clearly that TVEs were owned by the community under the supervision of the townships and villages. The success of the china TVES was as a result of the conducive economic environment provided by the government of China. TVEs enjoyed discriminative privileges that were not offered to the private and foreign firms. They were offered friendly loans and other resources that made them more competitive than the private and foreign firms and enterprises in the region. There was a severe discrimination by the local Chinese Government that made it difficult for foreign firms to succeed in China during the era of major 1980s reforms (Saich, 2001. Pg. 22). The argument that the success of the China TVE was as a result of the fact that ownership of the firms and their assets was not known holds no water. The study shows that they were collectively owned by the by the people and the local authorities and the villages.
The success of the China’s TVEs did not come as a result of lack of clear lines on who owned the firms and and their assets. The study has revealed that they were communally owned by the people through the townships and villages. The success was basically because they were favored against competition by the government of the time. The TVEs enjoyed favors in terms of grants and state loans that helped them to operate successfully. They also enjoyed unhealthy competitive advantage above local private firms and foreign firms. The government discriminated private and foreign firms making them less competitive. This is confirmed by the fact that they failed terribly by the year 1996 when the government declined from helping them and allowed fair competition from both private and foreign firms (Bell, Khoran &Kochhar 1993 pg16).
It is therefore true that the “The success of most firms and enterprises is based on clear lines of ownership of the firm and its assets’’. Those who own a firm have greatest impact of the operations of a firm. If a firm is state owned it normally enjoys a monopoly of market over other players in the same sector. Most of the state owned or public firms are victims of poor management and high employee turnover. Those in charge of resources allocation in such firms tend to misappropriate most of the inputs therefore making the firms less productive and competitive (Wong, 1988, pg. 9). On the other hand, privately owned firms are more profit oriented and they normally ensure that they remain competitive throughout to maximize their returns. In most cases privately owned firms and enterprises are more successful than the public and state owned firms.