When Iron Fist, Visible Hand, and Invisible Hand Meet: Firm-Level Effects of Varying Institutional Environments in China

Abstract

Traditionally, the Chinese government used an “iron fist” to control the economy and firms under central planning. However, the economic reforms since 1978 have substantially changed the institutional landscape. After more than two decades of dramatic economic transition, the economy is now neither planned nor market-based. Drawing from institutional theory, we examine the relationship between the government and firms and propose a number of hypotheses regarding how this relationship affects firm performance in China. We then test our hypotheses based on so far the largest and most authoritative industrial census data ever available to organizational research, which represents more than 90% of China's total industrial output. We find that government control at different levels, type of ownership, degree of privatization, and the government–firm bargaining relationship significantly affect firm performance. Our examination into the lishu relationship sheds light on an important heretofore unknown issue in firm performance during China's transitional economy. Implications for research, policy, and strategy are discussed.