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Are Private Firms More Likely to Break the Rules in China?

Why do companies break the law? The relentless pursuit of profit is often cited as a chief motivating factor, as is pride. Other times, firms are caught out by a rapid change in the regulatory landscape. However, a recent study reveals that not only are private companies in China more likely to operate on the wrong side of the law than their state-owned counterparts, but for some it is only by doing so that they can continue to survive in the cut-throat business environment.

The paper Does Ownership Matter? Firm Ownership and Corporate Illegality in China was co-written by Yang Haibin, Professor in the Department of Management at The Chinese University of Hong Kong (CUHK) Business School and Prof. Gao Yongqiang at Huazhong University of Science and Technology. The two scholars explored whether the ownership characteristics of a company, such as whether it is a state-owned enterprise or privately owned, would make it more likely to take part in illegal activities. They found that in transitional economies like China, where reforms are being implemented to alter the way its markets fundamentally function, privately owned companies are more likely to be enticed to conduct activities that are not strictly law-abiding to take advantage of legal loopholes.

Lower Social and Economic Status

In China as in many countries around the world, state-owned enterprises occupy a privileged position. Founded by the government to further political in addition to economic goals, many are able to easily access government-controlled resources such as subsidies and bank loans, as well as preferential tax rates and lower prices on key commodities such as land, water and power.

On the other hand, private enterprises were illegal in the country as recently as the 1950s and only began to grow as a sector as a result of the opening up of the economy starting in the late 1970s. Although they are now feted as the driver of the country’s growth in recent decades, this history means they are still typically deemed to be of lower social and economic status compared to their state-owned counterparts. As a result, they typically face hurdles in the form of serious market entry restrictions, as well as higher capital and energy costs, a lower level of access to subsidies, as well as being less favourably treated in factor markets and regulatory policies.


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