Property Rights and Managerial Incentives Within a Rural Chinese Shareholding Cooperative Enterprise

Abstract

The recent rapid transformation of rural collective enterprises into shareholding cooperative enterprises (SCEs) in China has received increasing academic attention. However there is little analysis on the exact impact of the shareholding reform upon managerial behavior in the newly created SCEs, and upon the capacity of local governments to coordinate an increasingly privatized local economy. This paper aims to address these issues through a case study of a shareholding cooperative enterprise in rural Zhejiang. The paper demonstrates that the introduction of the share- holding system has effectively improved managerial incentives for economic profitability with the emergence of a capital-owning entrepreneurial stratum. Improved economic performance in the case study enterprise and other SCEs has not been accompanied by signficant expansion of these enterprises, however due to the more cautious behavior of shareholder-managers in an increasingly competitive market. Hence, a new dilemma faced by local governments is how to maintain an administratively set high rate of economic growth in the face of the gradual privatization of the local economy. Due to the lack of attention paid by local governments to the proper operation of the governance structures of the shareholding system, moreover, problems of government intervention and opportunistic behavior of managers are still rampant in the SCEs.