The role of the state in business is hotly debate in some
parts of the world, but less controversial in other parts. A key reason for the
debate is that some think that the state can do some things better – for
example, having a long-term perspective and committing resources – while others
think the state should stay out because its decisions and execution are worse
than the private sector. Different parts of the world has reached different
answers, with the US standing apart as particularly skeptical of the state,
with most of Europe and important parts of Asia having a much more optimistic
view of the state.
One of the places with some controversy is actually China,
which has gone through a market transition but still has state intervention
both through state ownership and state grants to firms. This makes it a great
place for looking at what the state can do, and an article by Kevin Zhou,Gerald Gao, and Hongxin Zhao in Administrative Science Quarterly takes
advantage of this opportunity. Their
idea is simple. State ownership gives Chinese firms advantages both in general
financing and in funding research and development, which in turn should help
innovation. But, the effect on innovation will only happen if the firms are
actually good at using these extra resources. So, they need to pick good
research (decision making) and do the research and development well (execution)
in order to do better than firms without state ownership.
Their research has a rich set of results on state effects,
but the key conclusions are easy to summarize. Yes, state ownership means
getting more money for research and development. Yes, those funds are used less
effectively than in firms with no state ownership. And here is the interesting tradeoff:
the two effects don’t balance out; instead they make firms with some state
ownership superior to those with a lot, and with nothing. The advice is clear:
get some! And interestingly, this advice is particularly important not for established
firms, which one might think are the ones best able to milk the state for
funds, but for start-ups. The reason is that start-ups are better users of the
added funds they can get from the state. So, a state that understands this
relation should (as the Chinese state clearly does) not just give money to the
large and established firms, but also to startups.
And what happens if there is too much of the state? This is a problem seen some places in Europe, where there isn’t a deliberate
market transition as in China, and where the state has a fair amount of money. For
example, Norway has mostly been directing its oil-funded pension money abroad,
for a number of reasons including the peculiarity of owning firms and choosing
what firms should receive research funds. In spite of this caution, there is
still significant state funded research in Norwegian firms, and Financial Times
has reported some indications that it is used less effectively where there is a
lot of it. Just like in China.
Zhou, Kevin Zheng, Gerald Yong Gao, and Hongxin Zhao. 2016. "State
Ownership and Firm Innovation in China: An Integrated View of Institutional and
Efficiency Logics." AdministrativeScience Quarterly.
