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Employee participation in China's TVEs
EMPLOYEE
PARTICIPATION
IN CHINA’S TVEs
Stephen C. Smith
ABSTRACT: Experiences of employee participation in equity ownership, profit and gain sharing, and decision making participation in China’s TVEs during the current property rights reforms are examined through eight case studies from Zhejiang province. The evidence suggests that despite moves toward formal, pnvate ownership of TVEs, these firms will retain a htgh degree of employee financial participation, and to a lesser but significant degree decision-making voice, generally unmatched outside the OECD. The results offer a basis for more systematic research on the extent and effects of employee financial and decision participation in TVEs under the current property rights reform. JEL Classification: 023. 012. J33, B-4, P13. P32
INTRODUCTION This note examines experiences of employee participation in equity ownership, profit and gain sharing, and decision making participation in Township and Village Enterprises (TVEs) in China during the current property rights reform efforts, through eight case studies from Zhejiang Province on central coastal China. While the evolving employee role in TVEs can and does differ from region to region, the issues faced in Zhejiang are similar to those faced elsewhere in China. Moreover, as Zhejiang Province tends to be more advanced in its reforms than elsewhere in rural China, some perspective is gained from an in-depth look at how the internal organization of TVEs has evolved there to date. Insights may be gained that may be overlooked in econometric studies; but the present study is to be viewed as preliminary and only as complementary to, and suggestive of data to be collected for, later econometric research on large, randomly sampled data sets. Throughout the note, a basic familiarity with TVEs and the property rights issues raised by them is assumed. For further background, the reader is referred to Byrd and Gelb (1990); Byrd and Lin (1990); Chang (1994); Jefferson, Rawski and Zheng (1992); Jefferson and Rawski (1994); Li (1994); Ody (1992); Smith (1994~); Tian (1994); Wang and Chang (1994); Weitzman and Xu (1994); and Woo, Hai, Jin and Fan (1994).
CASE STUDIES The TVE site visits and interviews were conducted in August, 1994. In most cases the chief executive officer was interviewed, and typically a number of other senior managers as well. One serious drawback of the study was that in few cases could any ordinary workers be interviewed. This was due to the short length of visits in each firm (generally about three Direct aJJ correspondence Washington DC, 20052.
to: Stephen C. Smith
l
Department
of Economics,
China Economic Review, Volume 6, Number 1, 1995, pages 157- 167 All rights of reproduction in any form reserved.
George Washington
Copyright
University,
0 1995 by JAI press Inc. ISSN: 1043-951X.
158
CHINA ECONOMIC
REVIEW
VOLUME 6( 1)
1995
hours). However, in each case one or more plant site was toured, conditions of work could be closely examined, and short, informal exchanges with ordinary production workers often conducted. All firms interviewed operated in the manufacturing sector, but with products ranging from major capital goods to light consumer nondurables, with two being highly diversified. Selection of firms was conducted by the Zbejiang Institute of Asia Pacific Studies in consultation with local officials and a Chinese Economists Society committee. The firms should not be considered a strictly random sample; and though the direction of any bias is not self-evident, the firms, especially those in Wenzhou, are probably more de facto privately owned and managed than the median TVE. Table 1 provides basic background information on the firms studied, including names of the firms visited, their principal business lines, the year the firms were founded, their type of organizational form according to current Chinese legal practice, the level of production in the units (generally sales or value added) which were available at the time of the study, and the size of the labor force and nominal value of the capital stock. As can be seen in Table 1, interviewed firms ranged widely in size from 90 to 4100 employees. None of the firms appears to have been established prior to 1967, though for one firm the original starting date remained unclear. Five of the firms were shareholding cooperatives, though two of these were for practical purposes conventional private firms, and one other firm called itself a private company. The remaining two were more traditional township and village enterprises, respectively, though each had some formal employee ownership and one of these had outside shareholders. Table 2 provides the core information on the extent of employee ownership, gain and other income sharing, and decision making participation in the TVEs examined. Employee ownership is often a significanct part of privatization and property rights reform (Smith, 1994b). Column 1 gives the extent of employee ownership, in the context of the overall ownership structure. While exact levels of formalized ownership for ordinary employees could be determined in only five cases, this showed an enormous variability from 0 to 35 percent. Moreover, in the remaining three cases formalized ownership for ordinary employees was understood to be in the upper part of this range. This is followed in Table 2 with info~ation on the base wage, if any, followed by the extent of bonus, piece rate pay and profit (rt) share and then any other labor income. In the six firms for which information is available, five have a piece rate or bonus system related to enterprise results, and the remaining firm offers an effective 50 percent employee share purchase discount. The presence of a pension can be a positive factor in extending the time horizon of employee owner-participators (Ye, Smith, & Conte, 1992); and all firms for which information is available offered a significant pension scheme through either public channels, a private program, or both. The presence of a union is a traditional indication of employee voice. Table 2 also indicates the presence of a union and the role it plays, though this could only be determined for half the firms visited. Table 3 provides supplemental information, including any formal and informal employee role in the decision making process, such as older workers council (WC) forms as well as new committees and other channels. Most firms have a WC, in accordance with standard Chinese practice. The role of these WCs, as in other regions and sectors of the Chinese economy, is modest compared with, say, workplace codetermination (betriebsrate) councils
EMPLOYEE
PARTICIPATION IN CHINA’S TVES
159
in Germany and similar structures elsewhere in Europe (Smith, 1991, 1994d); but is substantial compared with most developing countries. Other participation channels include annual employee meetings, shareholders’ meetings, and managers’ “open door policies.” This is followed in Table 3 with information on the source of finance; while retained earnings appeared to be unusually important, the sources proved to be extremely diverse and otherwise showed no clear pattern across firms. Unwillingness of employees to finance investment with retained earnings is one of the potential pitfalls of majority employee ownership, though evidence for this is lacking (Bonin, Jones, & Putterman, 1993). No such reluctance is evident in these responses, though this may be due in part to legal restrictions on the disposal of profits and to the limited extent of employee voice. Next, each firm was asked how its investment decision was made, and specifically, whether a payback period criterion was used and if so how long. This was considered important because the literature on employee ownership expresses some concerns that employee-owners will have a shorter time horizon than conventional owners, with resulting depressing effect on investment levels. But empirical research on Italy, for example, shows little difference between payback periods between firms with no and full employee ownership (Bartlett, Cable, Estrin, Jones, & Smith, 1992), of about four and one half years each. Each of the four TVEs for which information could be obtained reported a short payback period, ranging from three months to five years. Certainly these periods are well within the working life time horizon of the typical manager and employee, suggesting that the retirement horizon was not providing a binding constraint on investment choice. Moreover, this short payback period reflects the short life of most of the capital goods under consideration; and interviews suggested that the type of capital goods utilized was considered essentially exogenous by management, though there was no way to independently verify this. Two other specialized questions were asked based upon the literature on employee participation. One of the hallmarks of firms with extensive employee participation in Western countries is comprehensive provisions for skill upgrading (Levine, 1995), though this is less true for participative firms in less developed countries. Relatively few such provisions were found in this sample, however, which could either reflect low participation in practice, or the less developed economic context. Firms were also asked about their sources of innovation. In Smith (1994a), evidence is presented that Italian industrial cooperatives have an organizational comparative advantage in emphasizing innovation strategies that utilize the knowledge of ordinary production workers. The TVEs in this sample use a wide variety of strategies for innovation. While three firms cited ordinary employees as an important source of innovation, other cited sources included trained engineers, national agenciesideas from customers, joint ventures (JVs) with multinational firms, and other foreign buyers. This eclectic pattern may reflect the different industries of the firms, their differing internal organizations, different ownership and gain sharing incentives received by employees, and differing levels of capitalization, as well as different company histories (under conditions of “path dependence”). Most likely innovation strategies of these firms are not in any equilibrium. Experience with numerous innovation strategies will no doubt provide TVEs with considerable valuable experience that may be selected from more systematically at a later point. TVEs have a close connection to the local economy. Most employees live in the township or village in which they work, and most capital is raised from local sources such as savings, retained earnings, and employee investments (Byrd & Lin, 1990; Ody, 1992).
Wanxiang Group, Xiao Shun
Shao Xing Di Yi Di Lun Chung
Shiqiau Village Group (12 Enterprises)
XmChang Dyeing & Printing Machinery Manufacturing Co.
2
3
4
Name
1
Firm #
Capital equipment for silk factories
Buildmg matenals, textiles and hardware
Polyester/ Synthetic Fibers
Car parts manufacturing; Also diversttied to tourism, etc.
Pnncipal Bus. Line
Collective township Ent., convertmg to shareholding cooperative
no mformation
In ‘93 gross value of Industrial output over 100 M Yuan Sales > IO0 M Yuan
in ‘93 Value of Industries output= 146 M Yuan
Collective Village Ent., or converting to partial employee ownership
most enterprises after 1978
800 M Yuan
Production (Sales or VAI
sales=147,350,000 YUan
Township enterprise; mixed. 37% collective shares; 37% mtemal shares Remainder outside shareholders on Shenzhen Stock Exchange
Tvpe of Ornanrzation
Joint stock cooperative
1986
1969
Year Founded
Table 1 Basic Description of the TVEs
over 800
2700
525
4100
L
K
fixed capital, 45 M Yuan
fixed K, 80 milhon working K, 20 M Yuan
102.360,OCO
590 M
--
Wenzhou ExplosionProof Electronics co.
Wenzhou Tourist Products Co.
7
8
_
Wenzhou Glass Company
toa)
sanhua Group (Xinchang Refrigeration Components Fac-
6
5
glass
Shoes, sandals
Electronic components; specialty valves.
Decorative products
Refrigeration and air conditioning components
sales=30 M Yuan
sales=50M Yuan
Material output > 6 million pairs of shoes No information on sales value.
Formed from combination of 3 small stores, officially registered as coop. share holding firm; part remains collective property for which an annual fee is paid to local gov’t. Private firm
Stockholding coop; with 6 shareholders, 3 principals, 1 being the major decisionmaker (the 2 others have veto Dower1
1980
1980
1988
sales= 8 1,150,OOO VIO=87.15 M Yuan
Group of 45 Village level tirms; reforming to shareholding cooperative fum. Active local gov’t role in industrial policy continues
1967
20,410,OOO
28M
130
500
Not reported
67 M to 79,000,OOO
90
1200
Part collective, undefined; Part shareholdmg sys. EO based on when employee Joined firm and when invested. Older workers can buy more subsidrzed shares.
JV’s: clear divtsron. EO for key employees stressed. collective 36.7% prefd stock 25% bonus 10% indiv. employee 27.4% of whtch 2/3 mgrs. l/3 reg.empl.
Exrsting collecttve shares owned by whole vtllage. not divided. New shares to employees who put up investment
1
2
3
Firm #
Ownership Structure W/ Employe Ownership (EO) Share
No mformation
no informatton
No informatton
Not stated
Not stated
Total annual income of employee=8095 Yuan
No mformatron
Yes; not specrfied
Pensum? Employees continue to recetve base wages which Increase when workers’ do; plus dividends if employee made mvestment
Other L-Income “Dtvidends” set at 20% Interest Compares w/10% m bank
Bonus/x-Share Piece-rate based = 60% of salary. Bonus has vaned: 3K-65K Yuan/yr. But based on “thnds princple.” Total labor income about 113 of total net Income, l/3 goes to tax, 113 IS reinvested
200 yuan/mo. ~ set at “subsrstence level”
Base Wage
Table 2 Structure of Industial Relations and Labor Participation
No mformatton
Yes. Appears to be only remammg channel of Influence for employees ahenated by property nghts reform whtch has largely excluded them
on role
Union? Role? Yes. No mformatton
5 R e
ij
R
F
Varied by posttion and senority. Gen Mgt.: mm. 60, max 200 shares. Ordinary worker: up to 1 share each year of service, plus, buy 1, get 1 free.
20% top managers 20% mid-mgrs. 35% ordinary empl. 20% village subsidized shares
All 22 local employees became part owners in 1988, but 80% held by 3 founders
CEO is 100% owner. No EO share because CEO fears workers will want voice
6M shares capital originally from 3 - family partnership
4
5
6
7
8
Yes, but not clear if temporary workers also recetve a penston
No information
Evidence suggests there was a union before ‘88, but it is unclear whether there is a union now Pension fund collected by the Bureau
No information
Employees get bonus at end of yr. or ea. 6 mos. at dtscretion of CEO. varies from “a few thousand to about 100,000 Yuan”
From 500 yuan to several thousand per month.
Bonuses for mgt. not eligible for piece rate
Yes. Head of union not shareholder
Not explicity mentioned but indirect evidence suggests there is a pension system
No Information
Piece-rate. Plus a bonus based on a variable share of profits.
no information
Piece rate only which averages 600 YuanImo.
No information
No information
No mformation
Dividends; plus bonus based on trme worked and prece rate; up to 10 times annual base wage reward for innovations
no information
None
No information
No information
No informatron
For employee share purchase: “buy 1, get 1 free” up to limit
no informatton
Democratically elected workers’ council (WC) has advisory and sometimes veto power; has strong role in training
Formerly had a WC. Under property rights reform, ordinary employees have been deliberately excluded from decision-makmg role. They have no real voice, only “exit” & “strike” options
WC meets twice yearly only to advise and hear mgt. reports
Has a WC, & employees may vote their shares
1
2
3
4
Fwm #
Employee Role in Deciston Process
Table 3
Source of Finance
no information
employees shares: required for skilled workers
majortty from retained earmngs
30% debt 70% all forms of equity
no information
no information
workers sent out of fum for traming; trainees are selected by management
Not important in this firm, but they do some on the Job traimng
“Not clearly stated”
Payback criteria, “less than 5 yrs.”
Pre-work trammg Upgrading when new K-equip. introduced, sometimes in other companies
Skdl Upgrading Process
Primarily utilizes Ideas from their customers
Firm uses national technology transfer agency; then adapts for local use wl knowledge of employees
Internal, from skilled engineers. “Firm receives high prices because of estabhshed reputation for quality”
Most innovations originate from employees. There IS a known formula of mnovations rewards based on cost-savmgs.
Sources of Innovation
and Property Rights Reform
“Not clearly stated”
How Inv. Dec. Made; Payback Per:
Special Issues in Labor Participation
“We started as a collective townshtp enterprise, but since most of our customers were SOEs, we began caflmg ourselves an SOE. Then we reverted to a collective and now are a partial shareholdmg cooperative.”
“We created our stock system to bond skilled labor to the firm. But we keep a limrt on how much can be held by individuals so that the whole village can get rich together.”
“PRs transrtion costs have been very htgh. But 2 & 3d-level managers had become disillusioned as they saw collegues makmg more money in outsrde enterpnses. We had to reform property rights to retam key employees.”
“We prefer to keep prop. rts. somewhat vague. Clarifymg them would cause more conflrct than rt would resolve”
Highltghts of Top M&s Stated Opmron on Property Rights (PRs) Reform
Outside workers none; local workers can vote as share owners.
WC meets every 6- 12 mos. in advisory/ info capacity
Only informal mtgs where employees can make suggestions which will be rewarded If used.
7
8
Ea. unit has a WC. There are annual info mtgs and WC makes suggestions anytime. Employees are rewarded if suggestions are adopted.
6
5
Advice of hired consultants; “hard to say in gen., but expect positive return to start within 3 mos.”
“We have a risktaking attitude”
Imtral investment, retained earnings, loans from friends & firms wl wluch do business. Easy to obtain loans from bank
Very short payback of a few montbstheir capital goods equipment used or rapidly changing fashions in glass art and design.
Off
Determined by mgr. l-3 yr. normal expected payback. 5 yr. an “absolute cut-
70% retained earnings and other mtemal sources; 18% banks; 12% informal sector
Most from short-term bank loans. But EO share important due to credit constraints and high interest rates; fm pays dividend less than int. rate.
Majority [70%] from banks, plus retained earnings & EO investments
fro main sources. 1)through JV’s 2)cooperation w/ area universities The company’s strategy is to develop “physically small products” wl lg. mkt. & high value added no information
CEO and Internal engineers
Internal knowledge; also JV’s and other foreign buyers
Hire skilled workers, technicians. Send workers out of firm for training
no information
Not important in thus firm
workers trained when hired. This may be continued if new products are mtroduced
“We have no EO because we do not wish to share decision making authority. If a worker leaves before his contract expires, he must pay for his training fees and forfeit a 200 Yuan escrow.”
“I do not hke to have my employees participate as owners or in decisions because they are poor men and they think like poor men. But I have formed shareholding coops with other wealthy businessmen like myself to open ventures in other citres.”
“When we started we called ourselves a collectrve for political reasons. In 1988 we took off the red hat and declared ourselves what we really are, a pnvate firm.”
“Our property rights reform results from the pressures we expect from four sources: 1) reformed SOEs, 2) private firms, 3) joint ventures, and 4) GATT. We want to bind workers to the financial wellbemg of the firm.”
166
CHINA ECONOMIC
REVIEW
VOLUME 6(l)
1995
These are conditions in which industrial districts flourish in Italy (Becattini, Pyke, & Sengenberger, 1990). Such indust~al districts, or clusters, have been a notable feature of industrial development in North Central Italy, where a majority of the industrial coops are found. Industrial districts have been found to be a key to the dynamism of this region (Piore & Sabel, 1984; Porter, 1990). But the case studies provided little evidence that TVEs tend to be geographically clustered by product. Recent research suggests that industrial districts may be impo~ant to the economic development of developing countries (Nadvi & Schmitz, 1994). Encouraging such clustering by product might be a way to further enhance TVE efficiency. Finally, detailed questions were asked of top management regarding their views of the property rights reform process in which they were engaged. In the final column of Table 3, a representative quotation from the managers of each firm is selected, which reveals perspectives from that firm and sheds light on the current situation of the TVE reform process, These quotations are reported without comment as they should be self-explanatory.
CONCLUSION The evidence from these case studies suggests that despite the accelerating moves toward formal, private ownership of TVEs, these firms will retain a degree of employee financial participation, and to a lesser but significant degree of decision-making voice, generally unmatched outside of the OECD (Ben-Mer & Jones, 1991). Taken together, the responses reported here should offer a basis for future, more systematic research on the extent and effects of employee financial and decision participation in China’s Township and Village Enterprises under the current property rights reform.
ACKNOWLEDGMENTS I would like to thank participants at the CES Panel on “The Theory of the Firm and Chinese Economic Reforms,” ASSA Meetings, Washington DC, Jan. 6-8, 1995; and at the “International Symposium on Property Rights of TVEs,” Hangzhou, China, August 6-8, 1994, especially those attending the preceding CES-sponsored field tour of TVEs: Chun Chang, Jiahua Che, Aimin Chen, Hongyi Chen, Thomas Gold, Wen Hai, David Li, Bruce Dee Sun, Guoqiang Tian, Yijiang Wang, Wing Thye Woo, and Anna Yaohui Zhao, for their suggestions and patient assistance with translations. Thanks also to Gary Jefferson, Louis Putterman and Jeffery Sachs for discussions. Travel assistance from the Chinese Economists Society, Ford Foundation and Zhejiang Institute of Asia Pacific Studies is gratefully acknowledged.
REFERENCES Bartlett, W., Cable, J., Estrin, S.. Jones, D.. & South, S. (1992). Labor-managed cooperatives and private firms in North-Central Italy: An empirical comparison. Industry and Labor Relations Review, 46, 103-118.
Becattini, G.. Pyke, F., & Sengenberger, W. (Bds.). (1990). Zndustrial districts cooperatton in Italy. Geneva: Industiral Labor Organization.
and inter-firm
167
EMPLOYEE PARTICIPATION IN CHINA’S TVES
Ben-Ner, A., & Jones, D. (1991). Employee ownership: An overview of its growing incidence around the world. Proceedings of the Industrial Relations Research Assocration (Vol. 43). Bonin, J. P., Jones, D. C., & Putterman, L. (1993). Theoretical and empirical studies of producer cooperatives: Will ever the twain meet? Journal of Economic Literature 31(3), 1290-1320. Byrd, W., & Gelb, A. (1990). Township, village andprivate industry in China S economic reform. PRE Working Paper WPS 406,World Bank. Byrd, W., & Lin Qmgsong (Ed.). (1990). Chmas rural industry: Structure, development and reform. New York: Oxford Publishing Company. Chang, C. (1994, August). The nature of the township enterprise. Paper presented at the International Symposium on Property Rights of TVEs, Hangzhou, China. Jefferson, G., Rawski, T. and Yuxin Zheng. (1992). Growth, efficiency and convergence in China’s state and collective industry. Econ. Dev. and Cultural Change, 40, 239-266. Jefferson, G., & Rawski, T. (1994). Enterprise reform in Chinese industry. Journal of Economic Perspectives, 8.47-70. Levine, D. J. (1995). Reinventing the workplace. Washington, D.C.: Brookings. Li, D. D. (1994. August). A theory of ambiguous property rights and the Chinese rural enterprises. Paper presented at the International Symposium on Property Rights of TVEs, Hangzhou, China. Nadvi, K., & Schmitz, H. (1994). Industrial clusters in LDCs:Review of experiences and research agenda. Discussion Paper 339, Sussex: Institute of Development Studies. Ody, A. J. (1992). Rural enterprise development in China, 1986-90. World Bank Discussion Paper 162. Piore, M., & Sabel, C. E. (1984). The second industrial divide. Possibilities forprosperity. Basic Books. Porter, M. (1990). The competitive advantage of nations. New York: Free Press. Smith, S. C. (1991). On the economic rationale Behavior and Organization, 16,261+X1.
for codetermmation
New York:
law. Journal of Economic
. (1994a). Innovation and market strategy in Italian industrial cooperatives: Econometric evidence on organizational comparative advantage. Journal of Economic Behavior and Organization, 23(3), 303-321. -.
(1994b). On the law and economics of employee ownership in privatization in developing and transition economies. Annals of Public and Cooperative Economics, 65(3), 437-468.
-.
(1994~. August) Property rights reform in China’s township and village enterprises: Implications from the economic theory and international experience of employee ownership. Paperpresented at the International Symposium on Property Rights of TVEs” Hangzhou. China.
. (1994d). Employee participation rights, training, and efficiency: Hypotheses and preliminary evidence from Germany. Washington, D.C.: Economic Policy Institute. Tian, G. (1994). Property rights structure and its reforms in TVEs. Paper presented at the International Symposium on Property Rights of TVEs, Hangzhou, China, August 6-8. Wang, Y., & Chun Chang. (1994). Towards a model of the organization and institutions in China as a partially reformed developing economy. Unpublished manuscript, Univ. of Minnesota. Weitzman, M., & Chenggang Xu. (1994). Chinese township-village enterprises as vaguely defined cooperatives. Journal of Comparative Economics, 18, 12 1- 145. Woo, W. T., Wen Hai., Yibiao Jin, & Gang Fan. (1994). How successful has Chinese enterprise reform been? Pitfalls in opposite biases and focus. Journal of Comparative Economics, 18,410-437. Ye, Meng-Hua, Smith, S. C., & Conte, M. (1992). Optimal internal investment in a labor-managed firm with heterogeneous membership: An overlapping generations approach. Journal of Comparative Economics, 16.479-493.
PARTICIPATION
IN CHINA’S TVEs
Stephen C. Smith
ABSTRACT: Experiences of employee participation in equity ownership, profit and gain sharing, and decision making participation in China’s TVEs during the current property rights reforms are examined through eight case studies from Zhejiang province. The evidence suggests that despite moves toward formal, pnvate ownership of TVEs, these firms will retain a htgh degree of employee financial participation, and to a lesser but significant degree decision-making voice, generally unmatched outside the OECD. The results offer a basis for more systematic research on the extent and effects of employee financial and decision participation in TVEs under the current property rights reform. JEL Classification: 023. 012. J33, B-4, P13. P32
INTRODUCTION This note examines experiences of employee participation in equity ownership, profit and gain sharing, and decision making participation in Township and Village Enterprises (TVEs) in China during the current property rights reform efforts, through eight case studies from Zhejiang Province on central coastal China. While the evolving employee role in TVEs can and does differ from region to region, the issues faced in Zhejiang are similar to those faced elsewhere in China. Moreover, as Zhejiang Province tends to be more advanced in its reforms than elsewhere in rural China, some perspective is gained from an in-depth look at how the internal organization of TVEs has evolved there to date. Insights may be gained that may be overlooked in econometric studies; but the present study is to be viewed as preliminary and only as complementary to, and suggestive of data to be collected for, later econometric research on large, randomly sampled data sets. Throughout the note, a basic familiarity with TVEs and the property rights issues raised by them is assumed. For further background, the reader is referred to Byrd and Gelb (1990); Byrd and Lin (1990); Chang (1994); Jefferson, Rawski and Zheng (1992); Jefferson and Rawski (1994); Li (1994); Ody (1992); Smith (1994~); Tian (1994); Wang and Chang (1994); Weitzman and Xu (1994); and Woo, Hai, Jin and Fan (1994).
CASE STUDIES The TVE site visits and interviews were conducted in August, 1994. In most cases the chief executive officer was interviewed, and typically a number of other senior managers as well. One serious drawback of the study was that in few cases could any ordinary workers be interviewed. This was due to the short length of visits in each firm (generally about three Direct aJJ correspondence Washington DC, 20052.
to: Stephen C. Smith
l
Department
of Economics,
China Economic Review, Volume 6, Number 1, 1995, pages 157- 167 All rights of reproduction in any form reserved.
George Washington
Copyright
University,
0 1995 by JAI press Inc. ISSN: 1043-951X.
158
CHINA ECONOMIC
REVIEW
VOLUME 6( 1)
1995
hours). However, in each case one or more plant site was toured, conditions of work could be closely examined, and short, informal exchanges with ordinary production workers often conducted. All firms interviewed operated in the manufacturing sector, but with products ranging from major capital goods to light consumer nondurables, with two being highly diversified. Selection of firms was conducted by the Zbejiang Institute of Asia Pacific Studies in consultation with local officials and a Chinese Economists Society committee. The firms should not be considered a strictly random sample; and though the direction of any bias is not self-evident, the firms, especially those in Wenzhou, are probably more de facto privately owned and managed than the median TVE. Table 1 provides basic background information on the firms studied, including names of the firms visited, their principal business lines, the year the firms were founded, their type of organizational form according to current Chinese legal practice, the level of production in the units (generally sales or value added) which were available at the time of the study, and the size of the labor force and nominal value of the capital stock. As can be seen in Table 1, interviewed firms ranged widely in size from 90 to 4100 employees. None of the firms appears to have been established prior to 1967, though for one firm the original starting date remained unclear. Five of the firms were shareholding cooperatives, though two of these were for practical purposes conventional private firms, and one other firm called itself a private company. The remaining two were more traditional township and village enterprises, respectively, though each had some formal employee ownership and one of these had outside shareholders. Table 2 provides the core information on the extent of employee ownership, gain and other income sharing, and decision making participation in the TVEs examined. Employee ownership is often a significanct part of privatization and property rights reform (Smith, 1994b). Column 1 gives the extent of employee ownership, in the context of the overall ownership structure. While exact levels of formalized ownership for ordinary employees could be determined in only five cases, this showed an enormous variability from 0 to 35 percent. Moreover, in the remaining three cases formalized ownership for ordinary employees was understood to be in the upper part of this range. This is followed in Table 2 with info~ation on the base wage, if any, followed by the extent of bonus, piece rate pay and profit (rt) share and then any other labor income. In the six firms for which information is available, five have a piece rate or bonus system related to enterprise results, and the remaining firm offers an effective 50 percent employee share purchase discount. The presence of a pension can be a positive factor in extending the time horizon of employee owner-participators (Ye, Smith, & Conte, 1992); and all firms for which information is available offered a significant pension scheme through either public channels, a private program, or both. The presence of a union is a traditional indication of employee voice. Table 2 also indicates the presence of a union and the role it plays, though this could only be determined for half the firms visited. Table 3 provides supplemental information, including any formal and informal employee role in the decision making process, such as older workers council (WC) forms as well as new committees and other channels. Most firms have a WC, in accordance with standard Chinese practice. The role of these WCs, as in other regions and sectors of the Chinese economy, is modest compared with, say, workplace codetermination (betriebsrate) councils
EMPLOYEE
PARTICIPATION IN CHINA’S TVES
159
in Germany and similar structures elsewhere in Europe (Smith, 1991, 1994d); but is substantial compared with most developing countries. Other participation channels include annual employee meetings, shareholders’ meetings, and managers’ “open door policies.” This is followed in Table 3 with information on the source of finance; while retained earnings appeared to be unusually important, the sources proved to be extremely diverse and otherwise showed no clear pattern across firms. Unwillingness of employees to finance investment with retained earnings is one of the potential pitfalls of majority employee ownership, though evidence for this is lacking (Bonin, Jones, & Putterman, 1993). No such reluctance is evident in these responses, though this may be due in part to legal restrictions on the disposal of profits and to the limited extent of employee voice. Next, each firm was asked how its investment decision was made, and specifically, whether a payback period criterion was used and if so how long. This was considered important because the literature on employee ownership expresses some concerns that employee-owners will have a shorter time horizon than conventional owners, with resulting depressing effect on investment levels. But empirical research on Italy, for example, shows little difference between payback periods between firms with no and full employee ownership (Bartlett, Cable, Estrin, Jones, & Smith, 1992), of about four and one half years each. Each of the four TVEs for which information could be obtained reported a short payback period, ranging from three months to five years. Certainly these periods are well within the working life time horizon of the typical manager and employee, suggesting that the retirement horizon was not providing a binding constraint on investment choice. Moreover, this short payback period reflects the short life of most of the capital goods under consideration; and interviews suggested that the type of capital goods utilized was considered essentially exogenous by management, though there was no way to independently verify this. Two other specialized questions were asked based upon the literature on employee participation. One of the hallmarks of firms with extensive employee participation in Western countries is comprehensive provisions for skill upgrading (Levine, 1995), though this is less true for participative firms in less developed countries. Relatively few such provisions were found in this sample, however, which could either reflect low participation in practice, or the less developed economic context. Firms were also asked about their sources of innovation. In Smith (1994a), evidence is presented that Italian industrial cooperatives have an organizational comparative advantage in emphasizing innovation strategies that utilize the knowledge of ordinary production workers. The TVEs in this sample use a wide variety of strategies for innovation. While three firms cited ordinary employees as an important source of innovation, other cited sources included trained engineers, national agenciesideas from customers, joint ventures (JVs) with multinational firms, and other foreign buyers. This eclectic pattern may reflect the different industries of the firms, their differing internal organizations, different ownership and gain sharing incentives received by employees, and differing levels of capitalization, as well as different company histories (under conditions of “path dependence”). Most likely innovation strategies of these firms are not in any equilibrium. Experience with numerous innovation strategies will no doubt provide TVEs with considerable valuable experience that may be selected from more systematically at a later point. TVEs have a close connection to the local economy. Most employees live in the township or village in which they work, and most capital is raised from local sources such as savings, retained earnings, and employee investments (Byrd & Lin, 1990; Ody, 1992).
Wanxiang Group, Xiao Shun
Shao Xing Di Yi Di Lun Chung
Shiqiau Village Group (12 Enterprises)
XmChang Dyeing & Printing Machinery Manufacturing Co.
2
3
4
Name
1
Firm #
Capital equipment for silk factories
Buildmg matenals, textiles and hardware
Polyester/ Synthetic Fibers
Car parts manufacturing; Also diversttied to tourism, etc.
Pnncipal Bus. Line
Collective township Ent., convertmg to shareholding cooperative
no mformation
In ‘93 gross value of Industrial output over 100 M Yuan Sales > IO0 M Yuan
in ‘93 Value of Industries output= 146 M Yuan
Collective Village Ent., or converting to partial employee ownership
most enterprises after 1978
800 M Yuan
Production (Sales or VAI
sales=147,350,000 YUan
Township enterprise; mixed. 37% collective shares; 37% mtemal shares Remainder outside shareholders on Shenzhen Stock Exchange
Tvpe of Ornanrzation
Joint stock cooperative
1986
1969
Year Founded
Table 1 Basic Description of the TVEs
over 800
2700
525
4100
L
K
fixed capital, 45 M Yuan
fixed K, 80 milhon working K, 20 M Yuan
102.360,OCO
590 M
--
Wenzhou ExplosionProof Electronics co.
Wenzhou Tourist Products Co.
7
8
_
Wenzhou Glass Company
toa)
sanhua Group (Xinchang Refrigeration Components Fac-
6
5
glass
Shoes, sandals
Electronic components; specialty valves.
Decorative products
Refrigeration and air conditioning components
sales=30 M Yuan
sales=50M Yuan
Material output > 6 million pairs of shoes No information on sales value.
Formed from combination of 3 small stores, officially registered as coop. share holding firm; part remains collective property for which an annual fee is paid to local gov’t. Private firm
Stockholding coop; with 6 shareholders, 3 principals, 1 being the major decisionmaker (the 2 others have veto Dower1
1980
1980
1988
sales= 8 1,150,OOO VIO=87.15 M Yuan
Group of 45 Village level tirms; reforming to shareholding cooperative fum. Active local gov’t role in industrial policy continues
1967
20,410,OOO
28M
130
500
Not reported
67 M to 79,000,OOO
90
1200
Part collective, undefined; Part shareholdmg sys. EO based on when employee Joined firm and when invested. Older workers can buy more subsidrzed shares.
JV’s: clear divtsron. EO for key employees stressed. collective 36.7% prefd stock 25% bonus 10% indiv. employee 27.4% of whtch 2/3 mgrs. l/3 reg.empl.
Exrsting collecttve shares owned by whole vtllage. not divided. New shares to employees who put up investment
1
2
3
Firm #
Ownership Structure W/ Employe Ownership (EO) Share
No mformation
no informatton
No informatton
Not stated
Not stated
Total annual income of employee=8095 Yuan
No mformatron
Yes; not specrfied
Pensum? Employees continue to recetve base wages which Increase when workers’ do; plus dividends if employee made mvestment
Other L-Income “Dtvidends” set at 20% Interest Compares w/10% m bank
Bonus/x-Share Piece-rate based = 60% of salary. Bonus has vaned: 3K-65K Yuan/yr. But based on “thnds princple.” Total labor income about 113 of total net Income, l/3 goes to tax, 113 IS reinvested
200 yuan/mo. ~ set at “subsrstence level”
Base Wage
Table 2 Structure of Industial Relations and Labor Participation
No mformatton
Yes. Appears to be only remammg channel of Influence for employees ahenated by property nghts reform whtch has largely excluded them
on role
Union? Role? Yes. No mformatton
5 R e
ij
R
F
Varied by posttion and senority. Gen Mgt.: mm. 60, max 200 shares. Ordinary worker: up to 1 share each year of service, plus, buy 1, get 1 free.
20% top managers 20% mid-mgrs. 35% ordinary empl. 20% village subsidized shares
All 22 local employees became part owners in 1988, but 80% held by 3 founders
CEO is 100% owner. No EO share because CEO fears workers will want voice
6M shares capital originally from 3 - family partnership
4
5
6
7
8
Yes, but not clear if temporary workers also recetve a penston
No information
Evidence suggests there was a union before ‘88, but it is unclear whether there is a union now Pension fund collected by the Bureau
No information
Employees get bonus at end of yr. or ea. 6 mos. at dtscretion of CEO. varies from “a few thousand to about 100,000 Yuan”
From 500 yuan to several thousand per month.
Bonuses for mgt. not eligible for piece rate
Yes. Head of union not shareholder
Not explicity mentioned but indirect evidence suggests there is a pension system
No Information
Piece-rate. Plus a bonus based on a variable share of profits.
no information
Piece rate only which averages 600 YuanImo.
No information
No information
No mformation
Dividends; plus bonus based on trme worked and prece rate; up to 10 times annual base wage reward for innovations
no information
None
No information
No information
No informatron
For employee share purchase: “buy 1, get 1 free” up to limit
no informatton
Democratically elected workers’ council (WC) has advisory and sometimes veto power; has strong role in training
Formerly had a WC. Under property rights reform, ordinary employees have been deliberately excluded from decision-makmg role. They have no real voice, only “exit” & “strike” options
WC meets twice yearly only to advise and hear mgt. reports
Has a WC, & employees may vote their shares
1
2
3
4
Fwm #
Employee Role in Deciston Process
Table 3
Source of Finance
no information
employees shares: required for skilled workers
majortty from retained earmngs
30% debt 70% all forms of equity
no information
no information
workers sent out of fum for traming; trainees are selected by management
Not important in this firm, but they do some on the Job traimng
“Not clearly stated”
Payback criteria, “less than 5 yrs.”
Pre-work trammg Upgrading when new K-equip. introduced, sometimes in other companies
Skdl Upgrading Process
Primarily utilizes Ideas from their customers
Firm uses national technology transfer agency; then adapts for local use wl knowledge of employees
Internal, from skilled engineers. “Firm receives high prices because of estabhshed reputation for quality”
Most innovations originate from employees. There IS a known formula of mnovations rewards based on cost-savmgs.
Sources of Innovation
and Property Rights Reform
“Not clearly stated”
How Inv. Dec. Made; Payback Per:
Special Issues in Labor Participation
“We started as a collective townshtp enterprise, but since most of our customers were SOEs, we began caflmg ourselves an SOE. Then we reverted to a collective and now are a partial shareholdmg cooperative.”
“We created our stock system to bond skilled labor to the firm. But we keep a limrt on how much can be held by individuals so that the whole village can get rich together.”
“PRs transrtion costs have been very htgh. But 2 & 3d-level managers had become disillusioned as they saw collegues makmg more money in outsrde enterpnses. We had to reform property rights to retam key employees.”
“We prefer to keep prop. rts. somewhat vague. Clarifymg them would cause more conflrct than rt would resolve”
Highltghts of Top M&s Stated Opmron on Property Rights (PRs) Reform
Outside workers none; local workers can vote as share owners.
WC meets every 6- 12 mos. in advisory/ info capacity
Only informal mtgs where employees can make suggestions which will be rewarded If used.
7
8
Ea. unit has a WC. There are annual info mtgs and WC makes suggestions anytime. Employees are rewarded if suggestions are adopted.
6
5
Advice of hired consultants; “hard to say in gen., but expect positive return to start within 3 mos.”
“We have a risktaking attitude”
Imtral investment, retained earnings, loans from friends & firms wl wluch do business. Easy to obtain loans from bank
Very short payback of a few montbstheir capital goods equipment used or rapidly changing fashions in glass art and design.
Off
Determined by mgr. l-3 yr. normal expected payback. 5 yr. an “absolute cut-
70% retained earnings and other mtemal sources; 18% banks; 12% informal sector
Most from short-term bank loans. But EO share important due to credit constraints and high interest rates; fm pays dividend less than int. rate.
Majority [70%] from banks, plus retained earnings & EO investments
fro main sources. 1)through JV’s 2)cooperation w/ area universities The company’s strategy is to develop “physically small products” wl lg. mkt. & high value added no information
CEO and Internal engineers
Internal knowledge; also JV’s and other foreign buyers
Hire skilled workers, technicians. Send workers out of firm for training
no information
Not important in thus firm
workers trained when hired. This may be continued if new products are mtroduced
“We have no EO because we do not wish to share decision making authority. If a worker leaves before his contract expires, he must pay for his training fees and forfeit a 200 Yuan escrow.”
“I do not hke to have my employees participate as owners or in decisions because they are poor men and they think like poor men. But I have formed shareholding coops with other wealthy businessmen like myself to open ventures in other citres.”
“When we started we called ourselves a collectrve for political reasons. In 1988 we took off the red hat and declared ourselves what we really are, a pnvate firm.”
“Our property rights reform results from the pressures we expect from four sources: 1) reformed SOEs, 2) private firms, 3) joint ventures, and 4) GATT. We want to bind workers to the financial wellbemg of the firm.”
166
CHINA ECONOMIC
REVIEW
VOLUME 6(l)
1995
These are conditions in which industrial districts flourish in Italy (Becattini, Pyke, & Sengenberger, 1990). Such indust~al districts, or clusters, have been a notable feature of industrial development in North Central Italy, where a majority of the industrial coops are found. Industrial districts have been found to be a key to the dynamism of this region (Piore & Sabel, 1984; Porter, 1990). But the case studies provided little evidence that TVEs tend to be geographically clustered by product. Recent research suggests that industrial districts may be impo~ant to the economic development of developing countries (Nadvi & Schmitz, 1994). Encouraging such clustering by product might be a way to further enhance TVE efficiency. Finally, detailed questions were asked of top management regarding their views of the property rights reform process in which they were engaged. In the final column of Table 3, a representative quotation from the managers of each firm is selected, which reveals perspectives from that firm and sheds light on the current situation of the TVE reform process, These quotations are reported without comment as they should be self-explanatory.
CONCLUSION The evidence from these case studies suggests that despite the accelerating moves toward formal, private ownership of TVEs, these firms will retain a degree of employee financial participation, and to a lesser but significant degree of decision-making voice, generally unmatched outside of the OECD (Ben-Mer & Jones, 1991). Taken together, the responses reported here should offer a basis for future, more systematic research on the extent and effects of employee financial and decision participation in China’s Township and Village Enterprises under the current property rights reform.
ACKNOWLEDGMENTS I would like to thank participants at the CES Panel on “The Theory of the Firm and Chinese Economic Reforms,” ASSA Meetings, Washington DC, Jan. 6-8, 1995; and at the “International Symposium on Property Rights of TVEs,” Hangzhou, China, August 6-8, 1994, especially those attending the preceding CES-sponsored field tour of TVEs: Chun Chang, Jiahua Che, Aimin Chen, Hongyi Chen, Thomas Gold, Wen Hai, David Li, Bruce Dee Sun, Guoqiang Tian, Yijiang Wang, Wing Thye Woo, and Anna Yaohui Zhao, for their suggestions and patient assistance with translations. Thanks also to Gary Jefferson, Louis Putterman and Jeffery Sachs for discussions. Travel assistance from the Chinese Economists Society, Ford Foundation and Zhejiang Institute of Asia Pacific Studies is gratefully acknowledged.
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Becattini, G.. Pyke, F., & Sengenberger, W. (Bds.). (1990). Zndustrial districts cooperatton in Italy. Geneva: Industiral Labor Organization.
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EMPLOYEE PARTICIPATION IN CHINA’S TVES
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