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Kaidong Feng School of Government, Peking University Qunhong Shen

The evolution of firms and their resource allocation for innovation: the impacts of institutional change. Kaidong Feng School of Government, Peking University Qunhong Shen School of Public Policy & Management, Tsinghua University. A brief of this research. Group-specific characters of firms.

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Kaidong Feng School of Government, Peking University Qunhong Shen

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  1. The evolution of firms and their resource allocation for innovation: the impacts ofinstitutional change KaidongFeng School of Government, Peking University QunhongShen School of Public Policy & Management, Tsinghua University

  2. A brief of this research • Group-specific characters of firms Institutional changes Authority Resource allocation Innovative capability

  3. A brief of this research • Group-specific characters of firms Authority Resource allocation Institutional changes Innovative capability • Backgrounds of strategy-makers • (a)Engineering backgrounds dominant; • (b)Non engineering backgrounds dominant • Structure of Authority: • (a)Centralized to key persons; • (b)Shared by a team/committee

  4. A brief of this research • Group-specific characters of firms Authority Resource allocation Institutional changes Innovative capability Whether the major part that implements organizational learning have access to this strategy-making mechanism

  5. Backgrounds Institutional reform at firm level Strategy-making • Path to the centralization of authority: • Controversy of management: AnGang Constitution vs. Magnitogorsk Constitution (1958-1961). • Started by “70 items of SOE regulation” (1961), against AnGang constitution; raised again by “20 items of SOE regulation” (1975) • Legitimatized by “factory director responsibility system” (1982), enhanced by “contract management responsibility system” (1986). • Reform in ownership solidified the authority structure • Shareholding reform (1993); Building modern corporate system (1998) • In theory, the SOEs obtained managerial autonomy through the reform during 1993-1998. Integration Org Learning

  6. Case studies • Four categories of firms: • 1: Sino-foreign joint ventures • 2: SOEs: type-1 manufacturing-based • 3: SOEs: type-2 S&T-based • 4: New indigenous firms

  7. Group-Specific characteristics of performance • Chinese power equipment industry in the 1990s • (two sectors: grid protection; generator control)

  8. Case 1: XiYi XiYi: largest instrument provider in East Asia in 1960s. XiYi-Yokogawa: set up in 1986. • Policy support: • Core case of TMFT policy; • Top-down Corporate reform: • Changes associated with requirements of foreign side • Financial support: • initial funding, regular cooperation(SOB); • Authority structure: • Two leaders (CHN); appointed by gmt • Backgrounds: • No engineering (cadre, mng, finance) • Organization: • R&D team dissembled (testing, marketing & service) • Leadership: • Lost control to foreign side (early-1990s); • Tech Progress: • Rely on imported tech; No indigenous innovation; • Business Dev: • Depression; Purchased by Yokogawa entirely (2007)

  9. Case 2: NanZi • NanZi: a pillar in the sector of grid protection equipment • NanZi & NaRi used to be the same enterprise before 1979: • The factory NanZi; The in-house R&D centre  NaRi • Policy support: • To follow the top-down corporate reform; core case of SOE reform • Financial support: • regular cooperation(SOB); • Authority structure: • Two leaders for each period • Stage-1 (1980s) • 1st gen leadership tried to maintain the tradition of in-house R&D • 40 personnel team; • brought in external experts as partners; brought in cooperative projects) • Leadership: • Organisational integration; • Tech Progress: • Maintain its technological leadership; • Business Dev: • prosperity

  10. Case 2: NanZi • NanZi: a pillar in the sector of grid protection equipment • NanZi & NaRi used to be the same enterprise before 1979: • The factory NanZi; The in-house R&D centre  NaRi • Policy support: • To adpt shareholding reform; core case of SOE to TMFT • Financial support: • regular cooperation(SOB); special financial aids for JV; candidate to be listed • Stage-2 (1991-2001) • 2nd gen leadership BG: appointed cadre, managers (frequently changed) • follow TMFT; pursue opportunity to be listed (2001)  economy scale first. • JV with Siemens (1997); Outsource techs from external; ignore in-house R&D force • Leadership: • Disorder; 30 subs by previous in-house R&D personnel • Tech Progress: • No integrated force, only 1 important product innv; marginal improv; rely on external for techs • Business Dev: • Overtaken by NaRi & new indigenous firms

  11. Case 2: NanZi • NanZi: a pillar in the sector of grid protection equipment • NanZi & NaRi used to be the same enterprise before 1979: • The factory NanZi; The in-house R&D centre  NaRi • Policy support: • To establish modern corporate system • Financial support: • regular cooperation(SOB); • Stage-3 (2001-) • 3nd gen leadership: sent by parent SOE group; since 2007, a financial expert appointed from outside • ‘Modernize’ the corporate (01-07); • Eliminate the disorder (07-) • Leadership: • Disorder (01-07) • Control recovered through eliminating 10+ subsidiaries • Tech Progress: • rely on external for techs; no indigenous innovation • Business Dev: • No strategic investment but deliver dividend each year;

  12. Case 3: NaRi • NaRi: a pillar in the sector of grid protection equipment since mid-1990s • NanZi & NaRi used to be the same enterprise before 1979. • The factory NanZi; The in-house R&D centre  NaRi • Policy support: • To enforce the reform of S&T institutes. • Financial support: • operation expenses from governmental appropriation; • Bank loans based on projects (80s-90s) • Authority • Held by two academic leaders • Emphasize the academic outcomes and rewards along with economic benefits • Lose control of in-house teams of S&T projects for the finance structure & the disciplinary structure. • Leadership: • Lose control, labs as strategic unit, 15+ subs • Tech Progress: • No integrated force, domestic tech leader of innovation • Business Dev: • Prosper since mid-90s. Limited scale of organization for each subsidiary (200)

  13. Case 4: XinHua • Xinhua: a pillar firm in automatic control of power system since late-1990s • NanZi & NaRi used to be the same enterprise before 1979. • The factory NanZi; The in-house R&D centre  NaRi • Policy support: • No. Policy Barriers to entry before mid-90s • Financial support: • No cooperation from SOBs before 1994; • Loans based on projects (business orders) during 1994-2001; • Cooperation from SOB since 2001. • Authority • Held by 1 academic leaders; Strategy-making shared by a core team (15-20); Share holding program as incentive. • Emphasize the product innovation along with economic benefits • Leadership: • Integration • Tech Progress: • Leading role in product and tech innovation in DCS. • Business Dev: • Prosper since mid-1994, seize the leading role since 2002.

  14. Inducement of financial restraints • Innovative firms in telecom equipment industry • Huawei: Internal financing • 50% salary (1991-1993) kept by company until the end of year, option to buy stock share. [98.58% share of Huawei were held by 65% of employees] • Selling business line (energy supply, 1993) • JVs with customers (engineering service, MOBECO, rate of dividend 30%  90m RMB in 1993) • ZTE: negotiation between the EMT and investors • The EMT ensured the rate of growth and dividend (1989-1993). • Retain and reinvest (1989-1997)

  15. Summary of case studies

  16. Discussion (1) • Reason for the absence of innovative engineers in strategy-making: • Originated from the Soviet model of factories • No departmental unit for product innovation in factories • R&D was carried out by the public S&T division • Impact of the “Trading Market for Technology” policy • Dominance of technological advance was given to foreign partners, no indigenous activities for innovation

  17. Discussion (2) • Impact of financial institutions: • SOEs: relied on loans, and accordingly relations to government • “assign-change-loan” (since 1979), high tax rate (profit delivery) • External finance as governmental tools to implement policies: TMFT particularly • Inducement for indigenous innovative firms to rely on internal sources

  18. Financial Inducement Majority: manufacturing-based; cost competition Indigenous firms Gorge: very few exceptions Minority: technology-based; innovative competition

  19. Conclusion • Innovative firms haven’t emerged naturally through • Reform of SOEs, neither via management reform or ownership reform. • Financial supports, neither via bank loan or stock market. • Financial mechanisms were mainly instruments to realize governmental schedule of development in the 1980s-1990s. • Critical differences between these firms are the relations between control of strategic resource and the core part of organizational learning, which were influenced remarkably in different ways by the institutional evolution in different firms.

  20. Thanks for your attention! • Feng Kaidong, k.feng@pku.edu.cn

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