NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

State Capitalism vs. Private Enterprise

Alexander Ljungqvist, Donghua Chen, Dequan Jiang, Haitian Lu, Mingming Zhou

NBER Working Paper No. 20930
Issued in February 2015, Revised in March 2016
NBER Program(s):   CF   LE

We study the efficiency of capital allocations at state-controlled and privately owned business groups in China. Using highly granular data on within-group capital transfers, we document stark differences: while private groups allocate more capital to units with better investment opportunities, state groups do the opposite, especially when part of the “national team.” Minority shareholders in state owned enterprises suffer as a result. External monitoring by outside investors helps discipline state groups’ tendency to ignore investment opportunities. We trace capital allocation decisions to the objectives of the Chinese Communist Party, which incentivizes managers to maintain social stability. Consistent with the party’s policy preferences, capital allocations are used to prop up struggling employers in high-unemployment areas and when many young men enter the local labor market, but the interests of the party and of managers may be misaligned.

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Document Object Identifier (DOI): 10.3386/w20930

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