Autonomy, incentive and trade: How does trade liberalisation reshape corporate decentralisation in China?

We study how trade liberalisation affects the extent of corporate decentralisation using the World Bank enterprise survey in China. In particular, we examine the autonomy of production, investment and employment decision and the incentive compensation of CEOs of subsidiary firms after China's entry in the World Trade Organization (WTO). We show that subsidiary firm CEOs receive more decision autonomy and higher powered incentives when facing increased foreign competition in output market. In contrast, subsidiary CEOs receive less decision autonomy and flat incentive compensation when foreign competition in subsidiaries’ input market intensifies. When examining subsidiary CEOs’ autonomy in different decisions, we find that CEOs’ investment autonomy is more responsive to foreign competition than employment and production autonomy. We explain this difference through the agency cost angle by showing that firms whose CEOs with greater investment autonomy tend to spend more on managerial perks. Taken together, this paper sheds new light on how trade liberalisation reshapes firms’ decentralisation decisions in a multi‐tasking principal‐agent setting.