State intervention and business group performance in China's transition economy.

Abstract

The issue of effects of state intervention on economic development, especially in transition economy, has long been debated and remains unsettled. Beyond the old free market vis-à-vis state intervention debate, after reviewing related theories, this study examines the contingent nature of state intervention affecting business group performance in the context of transition economy by identifying different modes of state intervention in China's transitional economy. Using the data on China's 76 business groups collected in 2006, and methods such as logistic regression model, OLS regression model, and MIMIC model, the study finds that, at the group level, modes of state intervention have different economic effects on business group performance, depending on the specific modes of intervention and the context of institutional environment in China's transitional economy. Through direct intervention such as ownership and officials and Chinese Communist Party members at the group level, state failed to provide positive economic effects. In other words, these kinds of modes of state interventions make business group perform less well economically in current China's institutional context. However, the result demonstrates the state ability to provide positive economic effects by matching the functional demands of market in the emerging market such as loans from state-controlled banks as financial support. The interaction effects of party control and financial support further confirms that, with the increase of financial support from the state, high party control dramatically reduces the probability of high group performance comparing with how party control. My study contributes to the business group literature by offering a contingency perspective on how modes of state intervention affect economic performance in a specific institutional context such as China's transitional economy, moving beyond the debate between political economy perspective and developmental state theory of political sociologists and economic sociologists.