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Market Competition, Plan Constraints, and Asset Diversion in the Enterprise Groups in China

  • Keun Lee


  • Donghoon Hahn


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An increasing number of Chinese companies are now taking the form of the enterprise groups. The enterprise groups often develop in China when the parent companies set up subsidiaries to enter into new profitable business areas. We interpret this phenomenon as a response to increasing market competition given the still plan-contrained environment such that exit from the old business fields is not easy due to institutional constraints, including social functions attached to the old businesses, such as job provisions. In this case, entry or expansion into new business fields is often accompanied by implicit or explicit asset diversion from the parent companies to new spin-off firms. This asset diversion tends to lead to the creation of hybrid parent companies characterized by low long-term investment ratio and low weight of business income of the parent companies relative to that of the whole group. Whereas this way of group formation by spin-offs can be considered as a'bottom-up' or voluntary response, grouping by the government-initiated M&A and state holding companies is more 'top-down' and seem to be less viable forms.

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Paper provided by Institute of Economic Research, Seoul National University in its series Working Paper Series with number no20.

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Date of creation: Jul 1999
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Handle: RePEc:snu:ioerwp:no20
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  1. Lee, Keun, 1993. "Property Rights and the Agency Problem in China's Enterprise Reform," Cambridge Journal of Economics, Oxford University Press, vol. 17(2), pages 179-94, June.
  2. Leff, Nathaniel H, 1978. "Industrial Organization and Entrepreneurship in the Developing Countries: The Economic Groups," Economic Development and Cultural Change, University of Chicago Press, vol. 26(4), pages 661-75, July.
  3. Lee, Keun & Mark, Shelley, 1991. "Privatization in China's industry," China Economic Review, Elsevier, vol. 2(2), pages 157-173.
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