State Accountability, Decision Horizon, and Managerial Practices in Chinese Firms

Valerie J. Karplus (MIT Sloan School of Management)
Thomas Geissmann (Massachusetts Institute of Technology)
Da Zhang (Massachusetts Institute of Technology)

Abstract: We examine whether external institutional linkages can affect management quality and its relationship to productivity in manufacturing firms. We draw on novel empirical evidence from China's transition economy, where state control cements legitimacy for a subset of firms. Using measures of management quality in Chinese firms from the World Management Survey (WMS), we observe large variation in average management practice levels across ownership types, with low scores for domestic private firms and high scores for state-owned firms, after controlling for firm size, labor skill level, and industry. We match the WMS management measures with firm's value-added total factor productivity (TFP) estimated using data from China's Annual Industrial Survey, and show that the magnitude of the relationship between management quality and TFP is larger at statistically-significant levels for state-owned firms compared to both domestic and foreign private firms. We trace these differences to individual practices, and find the practices most strongly associated with productivity in state-owned firms suggest long decision-making horizons and diverse goals beyond profit. Our findings suggest state firms, with access and accountability to state authorities, may be playing a "long game" to overcome a historical productivity disadvantage, whereas private firms may be more focused on short-term gains, affecting investments in, and payoffs to, management practices.