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Cost Behaviour of Chinese State-owned Manufacturing Enterprises in the 1980s

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  • Donald Hay
  • Guy Liu

Abstract

This paper aims to model the cost behaviour of Chinese state-owned enterprises in the 1980s. Given production autonomy and profit-related bonus incentives, state firms are expected to increase profits and therefore bonuses by changing their cost behaviours more rationally. However, since institutional constraints remain and distort the rational demand of the firm for input factors, the changes cannot go as far as expected by the standard neoclassical cost minimisation theory. Based on this, we derived a total cost function for Chinese state firms restricted by the government control over their total wage bills. We then test it using a panel data of 386 state manufacturing enterprises in the period 1983-87. It is found that the model predicted well. Despite the constraints, the reform did lead the firms to respond to both changes in factor prices in the directions expected by cost minimising behaviour and to bonus incentives to produce more efficiently.

Suggested Citation

  • Donald Hay & Guy Liu, 1998. "Cost Behaviour of Chinese State-owned Manufacturing Enterprises in the 1980s," International Review of Applied Economics, Taylor & Francis Journals, vol. 12(1), pages 25-37.
    • Handle: RePEc:taf:irapec:v:12:y:1998:i:1:p:25-37
    DOI: 10.1080/026921719800000023
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    References listed on IDEAS

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    1. Dollar, David, 1990. "Economic Reform and Allocative Efficiency in China's State-Owned Industry," Economic Development and Cultural Change, University of Chicago Press, vol. 39(1), pages 89-105, October.
    2. Liu, Zinan & Liu, Guy Shaojia, 1996. "The Efficiency Impact of the Chinese Industrial Reforms in the 1980's," Journal of Comparative Economics, Elsevier, vol. 23(3), pages 237-255, December.
    3. Jefferson, Gary H & Xu, Wenyi, 1994. "Assessing Gains in Efficient Production among China's Industrial Enterprises," Economic Development and Cultural Change, University of Chicago Press, vol. 42(3), pages 597-615, April.
    4. Kuan, Chen & Hongchang, Wang & Yuxin, Zheng & Jefferson, Gary H. & Rawski, Thomas G., 1988. "Productivity change in Chinese industry: 1953-1985," Journal of Comparative Economics, Elsevier, vol. 12(4), pages 570-591, December.
    5. Jefferson, Gary H & Rawski, Thomas G & Yuxin, Zheng, 1992. "Growth, Efficiency, and Convergence in China's State and Collective Industry," Economic Development and Cultural Change, University of Chicago Press, vol. 40(2), pages 239-266, January.
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    Cited by:

    1. Bo, Hong & Zhang, Zhihai, 2002. "The impact of uncertainty on firm investment: evidence from machinery industry in Liaoning province of China," Economic Systems, Elsevier, vol. 26(4), pages 335-352, December.

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