Managing Human Resources in State-Owned Enterprises in Transitional Economies-a case study in china

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Managing Human Resources in State-Owned Enterprises in Transitional Economies-a case study in china

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    Zhu, C. J. & Dowling, P. J. (2000). Managing Human Resources in State-Owned Enterprises in Transitional Economies: A Case Study in the People‟s Republic of China, Research and Practice in Human Resource

    Management, 8(1), 63-92.

    Managing Human Resources in

    State-Owned Enterprises in Transitional Economies: A Case Study in the People’s

    Republic of China

    Cherrie Jiuhua Zhu & Peter J. Dowling


    State-owned enterprises (SOEs) in China are at the centre of the government’s economic reforms because of their poor performance and low return on capital. However, they still employ about two thirds of China’s urban workforce and play a central role in the Chinese economy. In addition, many foreign companies have invested in China via international joint ventures with SOEs. Therefore, it is important to understand how employees are managed in SOEs and what impact the economic reform has had on human resource (HR)

    practices in SOEs. This paper examines HR practices through a case study conducted in a Chinese SOE. The study indicates that human resource activities were not conducted in a Western manner. Some Western HR

    activities were partially utilised, some existed in name only or with Chinese characteristics, while some were totally absent.


    State-owned enterprises (SOEs) in the People‟s Republic of China (PRC) have attracted the attention of business people and researchers throughout the world since the implementation of economic reform for a number of reasons. First, many foreign business people have established close links with Chinese SOEs through foreign direct investment (FDI). Of all the FDI vehicles in China, the international joint venture (IJV) is

    the most favoured. Even though there has been an increasing preference for establishing wholly-owned foreign subsidiaries rather than joint ventures since the mid-1990s, total investment in IJV in 1995 was still approximately 49% of total foreign investment in China (Zhao & Zhu, 1998: 570). While FDI in China has tended to take the form of IJVs, many SOEs have been selected as local partners (Child, 1993; Perkins, 1996). Beamish (1993) has also noted that large foreign companies, especially multinational enterprises (MNEs), often have a stronger association with government partners such as SOEs in China than in other developing countries, and can be locked into maintaining management practices that are a legacy of the pre-reform days. Second, SOEs are of interest to foreign companies because they play a central role in the Chinese economy. However, because of poor performance and low return on capital (e.g., Rawski, 1997; Yabuki, 1995), the reform of SOEs has now become an urgent issue facing China (Economist, May 3, 1997: 54). One of the key issues in SOE reform is to introduce radical changes in three systems: labour and personnel; wage and welfare; and social insurance. The traditional practices in these systems have been criticised for contributing to over-staffing, low efficiency, and making losses in many SOEs (Warner, 1995; Zhao 1995). Given that SOEs still employ about two-thirds of China‟s urban

    workforce and the government is reluctant to lay off millions of redundant employees, research on how human resources are managed in SOEs and the potential impact of reforms are of practical importance. It must be appreciated that Chinese human resource policies and practices are quite different from those used in developed and market-economy developing countries, and careful consideration of local idiosyncratic practices is required for foreign investors such as MNEs to operate successfully in China (e.g., Child, 1994; Ding et al., 1997; Gooda & Warner, 1997; Paik et al., 1996). Furthermore, current human resource practices in China still had a distinctive Chinese flavour, as they have been grafted on the old system (Warner, 1995). Therefore, knowledge of human resource practices prior to and during the reforms may help foreign companies to understand what changes have occurred and why it could be difficult for local managers to accept non-traditional or Western-style human resource management (HRM) practices. This is a prerequisite to formulating effective HRM strategies and activities in foreign invested enterprises (Child, 1993; Fung, 1995; Huo & Von Glinow, 1995).

    This paper aims to illustrate human resource practices in SOEs through a case study conducted in China in late 1994 by the first author who was a native speaker of Mandarin. The case study had three main objectives. First, to examine briefly the pre-reform personnel and labour administration and to highlight current HRM practices in a SOE with

    respect to six major HRM activities (human resource planning, recruitment and selection, performance appraisal, compensation and welfare, training and development, and labour relations). Second, to describe and analyse probable paths of HRM development in the future as a result of reforms. The final objective was to explore the impact of ownership types on HRM practices. A brief review of SOEs in China is presented first with subsequent explanation of the data collection methods. The case study then begins with an overview of the selected enterprise - TeleCo (a disguised name for the sake of confidentiality) - including its history and ownership, size and structure, and business strategy as well as the emerging role of the human resource function in the enterprise. Following the background information is a description and analysis of human resource practices in TeleCo, with emphasis on the current HRM practices in terms of the six major activities. The findings from this case study are summarised and discussed at the end of the paper.


    Soon after the founding of the PRC in 1949, private ownership of the means of production was transformed to public ownership, and “a

    hegemonic state-owned sector” emerged since the mid-1950s (Jackson,

    1992: 55). This is mainly because “the fundamental economic basis of the traditional socialist political superstructure, of the monolithic and bureaucratic party state and party dictatorship, is precisely the system of state ownership, i.e., a state monopoly on the means of production” (Talas, 1991: 330). According to Yang (1992: 52), in 1980, SOEs possessed 90% of the nation‟s total industrial fixed assets, employed 69% of the country‟s total industrial population, and produced 76% of the national gross industrial output by value.

    State-owned (guoyou) enterprises (SOEs), referred to officially as „enterprises owned by the whole people‟, used to be called state-run or

    state-operated (guoying) enterprises during Maois regime, which reflected the true nature of this type of enterprises before the reforms as they were under direct management and administration of the state (Yang, 1992). Assets in SOEs are legally owned by the people of the nation, who in theory are represented by the state. Being the owner and administrator of state assets, the government maintained an administrative rather than economic relationship with SOEs under a command economy (Chen, 1995). This relationship was characterised by three “unified practices” conducted by the state, i.e. unified purchasing of materials and selling of products (tonggou ton gxiao); unified receipt of earnings and allocation of expenditures of enterprises (ton gshou ton

    gzhi); and unified allocation of human resources to enterprises (tongbao tongpei) (Xiao, 1994:53).

    Because of these unified practices in a central planning system, Chinese SOEs demonstrated three distinct features as summarised by Walder (1986). First, SOEs‟ “financial performance was directly affected by

    negotiations with state planning agencies over its prices, costs, supplies, capital investment, credit, and taxation” rather than by business operations (Walder, 1986: 28). In this situation, the enterprise was constrained by its resources rather than demand, because whatever it produced would be distributed by the state. Second, the enterprise was a mini-society. It administered for the state its labour insurance and social security provisions, and supplied a wide range of public goods and services to its employees. These welfare obligations ranged from housing, cultural and gymnastic facilities such as libraries, schools and gyms, to barber shops and bathhouses (Ishihara, 1993: 28). Third the enterprise was also a political institution which had to perform a variety of socio-political services for its employees, such as providing permission to travel or get married and handling residency permits.

    This type of ownership gave the state “the legal authority to reallocate the control rights over and residual claims” from SOEs, even if the rights might be delegated to lower levels of government (Qian & Weingast, 1997: 258). Under the planned economic system, a SOE could be subordinated to the central government during a centralisation period and to a municipal or provincial government in a decentralisation period. However, the administrative relationship between the government and SOEs remained unchanged regardless of centralisation or

    decentralisation. While state ownership enabled the government to pursue its heavy-industry-oriented development strategy (Lin et al., 1996), SOEs, as the foundation of the planned economy, became the favoured recipient of government support, and were heavily subsidised and staunchly protected by the state (Warner, 1996). As a result, budget constraint for SOEs was soft, as has been observed by many researchers (e.g., Hay, et al., 1994; Kornai, 1980, 1986; Naughton, 1996; Walder, 1986). This level of protection also encouraged the development of related problems such as overstaffing and low efficiency (e.g., Lo, 1997; Wu, 1996; Zhu &Dowling, 1994).

    When ownership reform started in the 1980s as one of the two major economic reforms, it had two aims (Dong, 1992). One was to reform the existing ownership structure and the other was to reform state ownership per se. The reform of the ownership structure resulted in an upsurge and flourishing of non-state enterprises with various types of ownership, which in turn created intense competition between state and non-state enterprises. Table 1 indicates the changes. From Table 1 it can

    be seen that enterprises with private and other types of ownership rose

    remarkably from 0.02% and 0.48% in 1980 to 11.51% and 13.55% in

    1994 respectively. Meanwhile, SOEs declined steadily from 75.97% in

    1980 to 34.07% in 1994 (the 1994 figure for SOEs could be 40.05% if the

    output share of Others where SOEs have majority shareholding was

    calculated Lo, 1997: 4).

    In 1984 the State Council promulgated the „Provisional Regulations on

    Further Extending the Decision-Making Power of the State Industrial

    enterprises‟, offering SOEs more autonomy and due rights in their

    business operations. In 1992, the government decided to steer SOEs

    further into the market, holding them responsible for their own profits

    and losses, even in the face of bankruptcy (Beijing Review, 30 March

    1992: 4). After the 14th Party Congress in 1992, the term “state-owned

    enterprises” formally replaced “state-run enterprises”, indicating the

    government‟s intention to withdraw from enterprise management, and

    the terms were no longer used interchangeably (People‟s Daily, 2

    December 1992: 2; Wong, 1993: 35).

    Table 1

    Shares of gross value of industrial output by ownership sectors, 1980-94


    abcdSOEs COEs POEs Others

    1980 75.97 23.54 0.02 0.48

    1985 64.86 32.08 1.85 1.21

    1988 56.80 36.15 4.34 2.72

    1990 54.60 35.62 5.39 4.38

    1991 52.94 35.70 5.70 5.66

    1992 48.09 38.04 6.76 7.11

    1993 43.13 38.36 8.35 10.16

    1994 34.07 40.87 11.51 13.55

    aSOEs = state-owned enterprises;

    bCOEs = collectively-owned enterprises;

    cPOEs = privately-owned enterprises;

    dOthers = enterprises of other ownership forms, including foreign ioint

    ventures and wholly foreign-owned ventures.

    Sources : Adapted from Lo, 1997: 4. Also see Statistical Yearbook of

    China, 1990: 416 and 1995: 377.

    In spite of the reform of SOEs, they still had burdensome social

    mandates and restrictions, required huge state subsidies and many

    remained inefficient (Jefferson & Singh, 1997; Perkins, 1995; Qian &

    Weingast, 1997). Yabuki (1995: 49) reported that in the early 1990s, the

    labour productivity of foreign-invested and private-owned enterprises was over three times that of SOEs. Perkins (1995:2) has also noted that in 1985 only 10% of SOEs were making losses, but this had increased to 32% by 1990 and approximately 50% in early 1994. The share of gross value of industrial production contributed by SOEs had fallen to 48% by the end of 1992 (Warner, 1995: 63). However, they received about 90% of total subsidies in 1992 as well as subsidies disguised as loans (Qian & Weingast, 1997: 259-60).

    Although SOEs have been declining and the non-state sector has grown rapidly since the reforms, ownership reform in SOEs is regarded as critical because of the important role they play in the national economy (Dong 1992; Jefferson & Singh, 1997). In 1994, SOEs employed 75% of the urban industrial workforce, absorbed 57% of new investment and received 70% of bank loans (Mai & Perkins, 1997: 7). Apart from this economic role, public ownership (including state and collective) has always been emphasised by the Party and government as a dominant form of ownership and regarded as “the key characteristic distinguishing the socialist market economy” proposed in China (Liew 1997: 87).

    Therefore, SOE reform, aiming at marketising rather than privatising state enterprises, was listed as the central task of reform and development in the 1990s (Dernberger, 1997; Lo, 1997). The new SOEs‟ reform initiatives introduced in 1994 focused on two major tasks: the introduction of a modem enterprise system through corporatisation and shareholding, and restructuring of SOEs (Cliai & Docwra, 1997). While the former aimed to transplant the Western public enterprise model into China so as to enhance its internal efficiency, SOEs were restructured in order to reduce their debt burden, shed their surplus labour, divest themselves of their community services provision obligations, and so enable the state to withdraw from ownership of many industrial enterprises.

    The progressive reform of SOEs has profound implications for human resource practices in areas such as the centralised labour-allocation system, the practice of centrally fixed and egalitarianism-centred wage and welfare, and the unified training system. While Zhao (1994: 7) has noted that Chinese SOEs, especially large and medium-sized ones, “have

    the full stereotypical apparatus of Chinese labour-management relations with a consistent set of personnel practices”, Mai and Perkins (1997: 17) have observed that “one of the core problems of SOEs is their poor personnel management”. Child (1995) has also pointed out that the concept of Westem HRM is not found in Chinese enterprises, particularly SOEs. However, some researchers (e.g., Verma et al., 1995; Wamer, 1995) have observed that human resource practices in SOEs are gradually moving away from their traditional personnel and labour administration activities, even though current practices are still “more

operational (wage, social welfare calculations) than strategic” (Benson et

    al., 1998: 13). The TeleCo case study is used to illustrate how employees are currently managed in a SOE.


    The methodological triangulation that combines dissimilar techniques to study the same unit was adopted in this case study. The use of triangulation to bring more than one source of data to bear on a single phenomenon can enhance a study‟s generalisability as the data can be

    used to corroborate, elaborate, or illuminate the research (Marshall & Rossman, 1989). In addition, it can also help overcome unique deficiencies of each method, as different methods may complement and supplement each other and thus enhance the validity and reliability of the study (e.g., Denzin, 1989; Merriam 1998; Silverman, 1997, Yin, 1994). Following the logic underlying triangulation, three data collection strategies were adopted: documentation, interviewing and direct observation. Documentation included TeleCo‟s position descriptions for each department, internal newsletters and paperwork on the factory‟s history. Direct observation was made during the one-week field study at TeleCo, where the first author was shown around the factory and was given free access to workshops to talk with managers and employees. She also attended one department meeting on the fulfilment of production plans.

    The interviews were conducted entirely on the factory‟s premises, i.e. either in the manager‟s office or in the meeting room where privacy

    could be ensured. The average length of interview was about one hour with individuals and two hours with groups. Twenty-one people were interviewed as shown in Table 2, which also indicates where more than one interview was conducted or employees were interviewed in a group. As the terms „factory‟ and „director‟ are more commonly used in SOEs, they were used as equivalent of „company‟ and „general manager‟ respectively. The Director/Party Secretary of TeleCo had been appointed by the Municipal Post Bureau only 8 months prior to this case study being conducted, so he was only interviewed once. The Deputy Director in charge of the whole factory‟s administrative management joined TeleCo when it was just established and had worked there for 25 years. He was therefore interviewed three times, supplying and later assessing detailed information about TeleCo‟s past and current situation.

    Table 2

    Interviewees TeleCo case study

    ; Director/Party Secretary

    ; Deputy Director (production)

    ; Deputy Director (administrative management) (3 interviews)

    ; Deputy Director and Chairman of the trade union of TeleCo (trade


    ; Manager of Party Committee Office (Party and personnel affairs) (2


    ; Manager of Administration Office (labor and wage) (2 interviews)

    ; Manager (Quality Control Department)

    ; Manager (Research and Development Department)

    ; Manager (Production Department)

    ; Line Manager (Workshop 1)

    ; Line Manager (Workshop 2)

    ; Supervisors (4, interviewed in two groups, each of 2)

    ; Production workers (6, interviewed in two groups, each of 3)


    TeleCo was chosen as a case study because research access was available and the enterprise had the attributes that were essential to the research, such as its location (in a well-industrialised city), industry (manufacturing), size (medium), and ownership. This section provides brief background information on this enterprise - TeleCo, which will facilitate our understanding of its human resource practices to be presented later.

    Enterprise History and Ownership

    In late 1969 as the result of the Cultural Revolution, the Municipal Post and Telecommunication Bureau (hereafter referred to the Post Bureau) merged its three small factories to form TeleCo. During that turbulent period, Mao advocated that cadres should participate in manual labour and workers in management was re-emphasised with thousands of cadres and intellectuals sent to factories or communes to undertake manual work. This practice was reinforced by Maoís speech on May 7, 1969, that cadres should take manual work regularly to better serve the people. To follow Maoís teaching (called „May 7 instruction‟, wuqi zhishi), many „May 7‟ cadre schools (wuqi ganxiao, mainly in the country) and „May 7‟ factories (wuqi gongchang, mainly in the city) were set up in

    China for cadres, including intellectuals, to participate in manual work. The Post Bureau was no exception. It established TeleCo as a „May 7‟

    factory for its cadres, including managerial and technical staff (the majority of employees of the Post Bureau were either technicians or engineers, who were categorised as cadres).

    TeleCo was the Post Bureau‟s only manufacturing subsidiary. When the factory was set up, politically unreliable cadres and some workers from the Post Bureau were transferred there and some relatives of the Bureau staff were employed as TeleCo‟s permanent employees. In early 1970, the Municipal government allocated 60 demobilised soldiers and about 40 middle school students to the factory (since the late 1960s, millions of young people were sent to rural areas, while some were assigned to factories to be „re-educated‟ by farmers and workers). At that time the factory had about 200 permanent employees as well as cadres from the Post Bureau doing regular production work. The factory manufactured cables and other equipment and devices for telecommunications. Before the economic reforms, TeleCo was a typical SOE that followed the state‟s plans strictly without worrying about inputs and outputs so long as production quotas were fulfilled. However, during the transition period of the economic system, TeleCo found it hard to compete in the market because of various problems. First, the factory was constrained by its financial resources. The factory was not only owned but also operated by the Post Bureau, and the profits it had made were all submitted to the Bureau. TeleCo‟s total fixed assets in 1993 were only 10,000 yuan per employee on average, and this value was probably an overestimate as the depreciation rate was fixed at a very low level by the state. Although equipment was 15 to 20 years out of date, the factory could not afford to purchase new equipment because the Post Bureau was concerned about the poor return on investment. Second, there were excessive numbers of non-production employees and low quality human resources, especially workers. The ratio of production to non-production employees should normally be 100:14-17, but it was 1:1 in TeleCo. To aggravate the problem, many workers allocated in the 1970s had not received a proper education because of the Cultural Revolution. In addition, the factoiy had never conducted regular training programs to update the knowledge of its employees.

    Third, (and the most important issue in the eyes of the Director), SOEs could not compete equally with non-state enterprises because many state-imposed restrictions led to heavy burdens and rigid structures. For example, the factory operated as a small society by supplying various welfare services to its current and retired employees, such as housing, health care and pensions. In 1993 the factory paid out more than half a million yuan in medical expenses for over 100 of its retired employees. In addition, firing of employees was not permitted unless criminal offences had been committed. The factory was also not allowed to offer

    commissions to the purchasing agents of its products to facilitate sales, which was practised commonly by non-state enterprises. Finally, the factory had suffered from frequent changes of directors. During one three-year period (1991-93), four directors had been appointed. One was demoted because of embezzlement, one was transferred to another organisation because of his poor perforthance at TeleCo, one died, and the most recent one was appointed at the end of 1993.

    Due to these difficulties, the factory operated at a loss continuously from 1990 to 1993. The loss in 1993 was 6.5 million yuan, while the accumulated debts by the end of 1993 were 12 million-yuan. As the factory‟s total fixed assets accounted for only 4 million yuan, it was

    theoretically bankrupt. However, with the Post Bureau‟s protection, TeleCo was given a „policy loan‟ (a loan without interest) to pay its employees, and was exempted from any tax on revenue in 1993 and 1994. With this government support, TeleCo continued its operations. Organisational Size and Structure

    In 1994 TeleCo employed 438 staff and workers and had 112 retired employees on its payroll. This meant that every 4 current employees had to support 1 retiree, covering the pension and all other welfare expenses. Among 438 employees, 98.6% were permanent and the rest were on contract. The factory‟s total production output value in 1993 was 10 million yuan, or just over 22,000 yuan per head annually (in comparison, the output value per head in a foreign joint venture, CableCo, which was in the same industry and located in the same city was about 410,000 yuan in 1993). However, the figure for the output value per head in 1993 should only be used for reference. This is because up to 1994, the contract management responsibility system (CMRS) was still in existence and contracts used in the CMRS were negotiated individually between the enterprise and its supervisory agency. The system encouraged enterprises to negotiate lower output quotas and tax rates to ease their budget position (see Chai & Docwa, 1997; Fan, 1994; Wong, Heady & Woo, 1995). SOEs could gain extra profits by obtaining input materials at the state-fixed low price and selling their output above the quotas negotiated with the state at the market price (this extra profit was called institutional rent, see Lin et al., 1996: 203-8).

    The factory had 2 offices, 9 departments and 3 workshops as shown in Figure 1. The Administration (abbreviated as Admin. in Figure 1) Office, also called Director‟s Office, was responsible for two major tasks. One was to assist the Director and Deputy Directors in their administration work, and the other was to manage labour and wages, including annual human resource planning, worker‟s transfer or employment, wage

    reform and training. It was also in charge of the workers‟ personal files

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