The impact of political constraints and formal incentive systems on the performance of Chinese State‐owned enterprises

Purpose - The purpose of this paper is to investigate the influence of liberalization forces, political constraints (on labor decisions) and formal control mechanisms (i.e. delegation of decision authority, objective performance measurement and merit‐based rewards) on the performance of Chinese State‐owned enterprises (SOEs). Design/methodology/approach - A survey instrument was used to collect data from functional managers representing over 500 SOEs. Structural equation modeling was used to analyze the data. Findings - The findings revealed significant and positive path relationships between liberalization forces and each of the formal control mechanisms, leading to firm performance. The findings also reveal that political constraints have a significant and negative path relationship with objective performance measures and firm performance. Originality/value - The evidence provided in this study adds to our understanding of the role the institutional environment plays in the structuring and management of the firm in transitional economies. The topic is of interest, given the pace of modernization of firms in emerging economies, and the differences in the institutional “rules of the game” that exist compared with developed economies. Both of these forces have the potential to affect not only the management control practices in emerging economy firms, but also other firms that do business with them.