Skip to main content

Multi-Level State Capitalism: Chinese State-Owned Buisness Groups

  • Jakob Arnoldi (a1), Anders Ryom Villadsen (a1), Xin Chen (a2) and Chaohong Na (a3)

We argue that vertical interlocks in Chinese state-owned business groups are important mechanisms for coordination and information exchange between the apex firm and affiliated firms, and that they are also mechanisms for government owners of the business groups to exercise control. By combining resource dependence theory with elements from transaction cost economics and agency theory, we propose that the need for interlocks increases the higher the level of government ownership. The central government is therefore more likely to use vertical interlocks than the provincial governments, which again are more likely to use vertical interlocks than the municipal governments. We develop three hypotheses based on these arguments. A regression analysis of a hand-collected data set finds strong support for our hypotheses. Our results shed light on coordination and governance issues within the state-owned sector in China and on an important means for mitigating these issues used by the government owners and firms affiliated with state-owned groups.

Corresponding author
Corresponding author: Jakob Arnoldi (
Hide All

Accepted by: Senior Editor Lin Cui

Hide All
Arnoldi, J., & Villadsen, A. R. 2015. Political ties of listed Chinese companies, performance effects, and moderating institutional factors. Management and Organization Review, 11(2): 217236.
Au, K., Peng, M. W., & Wang, D. 2000. Interlocking directorates, firm strategies, and performance in Hong Kong: Towards a research agenda. Asia Pacific Journal of Management, 17(1): 2947.
Bai, C.-E., Lu, J., & Tao, Z. 2006. The multitask theory of state enterprise reform: Empirical evidence from China. The American Economic Review, 96(2): 353357.
Baron, R. M., & Kenny, D. A. 1986. The moderator–mediator variable distinction in social psychological research: Conceptual, strategic, and statistical considerations. Journal of Personality and Social Psychology, 51(6): 11731182.
Bertrand, M., & Mullainathan, S. 2003. Pyramids. Journal of the European Economic Association, 1(2–3): 478483.
Bhaumik, S. K., & Gregoriou, A. 2010. ‘Family’ ownership, tunnelling and earnings management: A review of the literature. Journal of Economic Surveys, 24(4): 705730.
Boisot, M., & Child, J. 1996. From fiefs to clans and network capitalism: Explaining China's emerging economic order. Administrative Science Quarterly, 41(4): 600628.
Buchwald, A. M., & Bischoff, O. 2016. Horizontal and vertical firm networks, corporate performance and product market competition. MPRA Paper No. 63413.
Chen, C. J. P., Li, Z. Q., Su, X. J., & Yao, Y. W. 2012. Delegation and sensitivity of CEO turnover to firm performance within business groups: Evidence from China. Journal of Accounting and Public Policy, 31(6): 553574.
Chen, G., Firth, M., & Xu, L. 2009. Does the type of ownership control matter? Evidence from China's listed companies. Journal of Banking & Finance, 33(1): 171181.
Chen, V., Li, J., & Shapiro, D. 2011. Are OECD-prescribed ‘good corporate governance practices’ really good in an emerging economy? Asia Pacific Journal of Management, 28(1): 115138.
Chen, X., Arnoldi, J., & Na, C. 2015. Governance structure and related party loan guarantees: The case of Chinese family business groups. Management & Organization Review, 11(4): 599619.
Claessens, S., Djankov, S., & Lang, L. H. P. 2000. The separation of ownership and control in east Asian corporations. Journal of Financial Economics, 58(1): 81112.
Davis, G. F. 1996. The significance of board interlocks for corporate governance. Corporate Governance: An International Review, 4(3): 154159.
Fan, J., Wong, T. J., & Zhang, T. 2013. Institutions and organizational structure: The case of state-owned corporate pyramids. Journal of Law, Economics, and Organization, 29(6): 12171252.
Foss, N. J., & Weber, L. 2016. Moving opportunism to the back seat: Bounded rationality, costly conflict, and hierarchical forms. Academy of Management Review, 41(1): 6179.
Guillen, M. F. 2000. Business groups in emerging economies: A resource-based view. Academy of Management Journal, 43(3): 362380.
Haunschild, P. R. 1993. Interorganizational imitation: The impact of interlocks on corporate acquisition activity. Administrative Science Quarterly, 38(4): 564592.
Haunschild, P. R., & Beckman, C. M. 1998. When do interlocks matter?: Alternate sources of information and interlock influence. Administrative Science Quarterly, 43(4): 815844.
He, J., Mao, X., Rui, O. M., & Zha, X. 2013. Business groups in China. Journal of Corporate Finance, 22: 166192.
Hillman, A. J., Withers, M. C., & Collins, B. J. 2009. Resource dependence theory: A review. Journal of Management, 35(6): 14041427.
Jensen, M. C., & Meckling, W. H. 1976. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4): 305360.
Jiang, G., Lee, C., & Yue, H. 2010. Tunneling through intercorporate loans: The China experience. Journal of Financial Economics, 98(1): 120.
Keister, L. A. 1998. Engineering growth: Business group structure and firm performance in China's transition economy. American Journal of Sociology, 104(2): 404440.
Keister, L. A. 2001. Exchange structures in transition: Lending and trade relations in Chinese business groups. American Sociological Review, 66(3): 336360.
Keister, L. A., & Zhang, Y. 2009. Organizations and management in China. The Academy of Management Annals, 3(1): 342377.
Krug, B., & Hendriscke, H. 2008. Framing China: Transformation and institutional change through co-evolution. Management and Organization Review, 4(1): 81108.
Li, L., Tian, G., & Yan, W. 2013. The network of interlocking directorates and firm performance in transition economies: Evidence from China. Journal of Applied Business Research (JABR), 29(2): 607620.
Li, M. H., Cui, L., & Lu, J. 2014. Varieties in state capitalism: Outward FDI strategies of central and local state-owned enterprises from emerging economy countries. Journal of International Business Studies, 45(8): 9801004.
Lin, L. W., & Milhaupt, C. J. 2013. We are the (national) champions: Understanding the mechanisms of state capitalism in China. Stanford Law Review, 65(4): 697759.
Lin, N. 2011. Capitalism in China: A centrally managed capitalism (CMC) and its future. Management and Organization Review, 7(1): 6396.
Lin, Z. J., Peng, M. W., Yang, H., & Sun, S. L. 2009. How do networks and learning drive M&As? An institutional comparison between China and the United States. Strategic Management Journal, 30(10): 11131132.
Liu, L. 2008. Local government and big business in the People's Republic of China – Case study evidence from Shandong Province. Asia Pacific Business Review, 14(4): 473489.
Liu, Q., Zheng, Y., & Zhu, Y. 2010. The evolution and consequence of Chinese pyramids. Unpublished working paper.
Lu, Y., & Shi, X. 2012. Corporate governance reform and state ownership: Evidence from China. Asia-Pacific Journal of Financial Studies, 41(6): 665685.
Lu, Y., & Yao, J. 2006. Impact of state ownership and control mechanisms on the performance of group affiliated companies in China. Asia Pacific Journal of Management, 23(4): 485503.
Luo, Y. 2003. Industrial dynamics and managerial networking in an emerging market: The case of China. Strategic Management Journal, 24(13): 13151327.
Ma, J., & DeDeo, S. 2016. State power and elite autonomy: The board interlock network of Chinese non-profits. arXiv preprint arXiv:1606.08103v2.
Maman, D. 1999. Research note: Interlocking ties within business groups in Israel – A longitudinal analysis, 1974–1987. Organization Studies, 20(2): 323339.
Meyer, M. W., & Lu, X. 2004. Managing indefinite boundaries: The strategy and structure of a Chinese business firm. Management and Organization Review, 1(1): 5786.
Mizruchi, M. S. 1996. What do interlocks do? An analysis, critique, and assessment of research on interlocking directorates. Annual Review of Sociology, 22: 271298.
Mookherjee, D. 2006. Decentralization, hierarchies, and incentives: A mechanism design perspective. Journal of Economic Literature, 44(2): 367390.
Opie, W., Tian, G. G., & Zhang, H. F. 2017. Can corporate pyramids restrain overinvestment? Evidence from Chinese state-owned enterprises.
Peng, W. N. Q., Wei, K. C. J., & Yang, Z. S. 2011. Tunneling or propping: Evidence from connected transactions in China. Journal of Corporate Finance, 17(2): 306325.
Pfeffer, J., & Salancik, G. R. 2003. The external control of organizations. Stanford: Stanford University Press.
Pombo, C., & Gutiérrez, L. H. 2011. Outside directors, board interlocks and firm performance: Empirical evidence from Colombian business groups. Journal of Economics and Business, 63(4): 251277.
Riyanto, Y. E., & Toolsema, L. A. 2008. Tunneling and propping: A justification for pyramidal ownership. Journal of Banking & Finance, 32(10): 21782187.
Rommens, A., Cuyvers, L., & Deloof, M. 2007. Interlocking directorates and business groups: Belgian evidence. Working Paper, University of Antwerp, Faculty of Applied Economics.
Schoorman, F. D., Bazerman, M. H., & Atkin, R. S. 1981. Interlocking directorates: A strategy for reducing environmental uncertainty. Academy of Management Review, 6(2): 243251.
Sutherland, D., & Lutao, N. 2012. The emergence and evolution of Chinese business groups: Are pyramidal groups forming? In Naughton, B. & Tsai, K. S. (Eds.), State capitalism, institutional adaptation, and the Chinese miracle: 102153. New York: Cambridge University Press.
Verbeke, A., & Yuan, W. 2005. Subsidiary autonomous activities in multinational enterprises: A transaction cost perspective. Management International Review, 45(2): 3152.
Walder, A. G. 1993. Corporate organization and local government property rights in China. In Milor, V. (Ed.), Changing political economies: 5366. Boulder: Lynne Rienner Publishers.
Walder, A. G. 1995. Local governments as industrial firms: An organizational analysis of China's transitional economy. The American Journal of Sociology, 101(2): 263301.
Wang, J., & Ye, K. 2014. Managerial agency costs of socialistic internal capital markets: Empirical evidence from China. Journal of International Financial Management and Accounting, 25(1): 137.
Weber, L., & Mayer, K. 2014. Transaction cost economics and the cognitive perspective: Investigating the sources and governance of interpretive uncertainty. Academy of Management Review, 39(3): 344363.
Williamson, O. E. 1981. The economics of organization: The transaction cost approach. American Journal of Sociology, 87(3): 548577.
Williamson, O. E. 1983. Markets and hierachies: Analysis and antitrust implications. New York: Free Press.
Williamson, O. E. 1988. Corporate finance and corporate governance. Journal of Finance, 43(3): 567591.
Yang, Y., & Cai, N. 2011. Interlocking directorate and firm's diversification strategy: Perspective of strategy learning. In M. Dai (Ed.), Innovative computing and information: 8794. Berlin, Heidelberg: Springer.
Yi, Z., & Xi, L. 2006. Ownership structure and corporate diversification. Business & Politics, 8(1): 119.
Yiu, D. W., Lu, Y., Bruton, G. D., & Hoskisson, R. E. 2007. Business groups: An integrated model to focus future research. Journal of Management Studies, 44(8): 15511579.
Young, M. N., Peng, M. W., Ahlstrom, D., Bruton, G. D., & Jiang, Y. 2008. Corporate governance in emerging economies: A review of the principal–principal perspective. Journal of Management Studies, 45(1): 196220.
Xu, C. 2015. China's political-economic institutions and development. Cato Journal, 35(3): 525548.
Zajac, E. J. 1988. Interlocking directorates as an interorganizational strategy: A test of critical assumptions. Academy of Management Journal, 31(2): 428438.
Zhang, Q. 2016. A comparative study of the effect of interlocking directorates on merger target selection under different merger and acquisition modes. American Journal of Industrial and Business Management, 6(3): 259267.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Management and Organization Review
  • ISSN: 1740-8776
  • EISSN: 1740-8784
  • URL: /core/journals/management-and-organization-review
Please enter your name
Please enter a valid email address
Who would you like to send this to? *



Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed