Institutional change and industrial innovation in transitional economies

RESEARCH PAPER SERIES ENTERPRISE BEHAVIOR AND EcoNOMIC REFORMS: A COMPARATIVE STUDY IN CENTRAL AND EASERN EUROPE AND INDUSTRIAL REFORM AND PRODUCrIVITY IN CHINESE ENTERPRISES RESEARCH PROJECTS OF THE WORLD BANK CHINA NUMBER CH-RPS #27 FEBRUARY 1994 INSTITUTIONAL CHANGE AND INDUSTRIAL INNOVATION IN TRANSITIONAL ECONOMIES by Gary H. Jefferson Department of Economics Brandeis University Waltham, MA 02154 lomas G. Rawski Department of Economics University of Pittsburgh Pittsburgh, PA 15260 Yuxin Zheng Institute of Quantitative and Technical Economics Chinese Academy of Social Sciences Beijing 100732, China Prepared for a panel on "Innovation and Technology Transfer in East Asia" at the meetings of the American Economic Association, Boston MA, January 3-6, 1994. Transition Economics Division Policy Research Department World Bank Washington, D.C. CONTENTS ACKNOWLEDGEMENT ........................................... i I. INTRODUCTION....................................................... II. INSTITUTIONAL FRONTIERS AND INNOVATION LADDERS ................. 2 IlI. CHINA'S TEXTILE INDUSTRY DURING THE REFORM PERIOD ............... 5 IV. INSTITUTIONAL FRONTIERS IN CHINA'S TEXTILE INDUSTRY ............... 6 V. INNOVATION LADDERS IN CHINESE INDUSTRY ....................... 9 VI. MOVEMENT OF TECHNOLOGIES DOWN THE LADDER .................. 10 VII. MOVEMENT OF COST-REDUCTION PRESSURES UP THE LADDER ........... 12 VIII. DYNAMIC TRANSFORMATION IN CHINESE INDUSTRY .................. 13 IX. CONCLUSIONS AND AGENDA FOR FURTHER RESEARCH ................. 16 R EFERENCES ............................................................ 18 FIGURE 1 PRODUCTION LADDERS IN CHINA'S TEXTILE AND GARMENT INDUSTRIES ... 21 TABLE A PRINCIPAL SPECIALIZED EQUIPMENT IN THE TEXTILE INDUSTRY ......... 22 TABLE 1 SUMMARY OF CHINA'S TEXTILE INDUSTRY, 1980-1992 ............ 23 TABLE 2 PRODUCTIVITY PERFORMANCE OF CHINA'S TEXTILE INDUSTRIES DURING THE 1980s .......................................... 24 TABLE 3 AVERAGE WAGES FOR DIFFERENT CLASSES OF ENTERPRISE IN CHINA'S TEXTILE INDUSTRY, 1989-91 ................... 25 ACKNOWLEDGEMENT1 The research projects on "Enterprise Behavior and Economic Reforms: A Comparative Study in Central and Eastern Europe", and "Industrial Reforms and Productivity in Chinese Enterprises" are research initiatives of the Transition Economics Division (PRDTE) of the World Bank's Policy Research Department and managed by I.J. Singh, Lead Economist. These projects are being undertaken in collaboration with the following institutions: for the project in China, The Institute of Economics of the Chinese Academy of Social Sciences (IE of CASS), The Research Center for Rural Development of the State Council (RCRD), and The Economic Systems Reform Institute (ESRI), all in Beijing; and for the projects in Central and Eastern Europe The London Business School (LBS); R6forme et Ouvertures des Systhmes Economiques (post) Socialistes (ROSES) at the University of Paris; Centro de Estudos Aplicados da Universidade Cat6lica Portuguesa (UCP) in Lisbon; The Czech Management Center (CMC) at teldkovice, Czech Republic; The Research Institute of Industrial Economics of the Janus Pannonius University, Peds (RIIE) in Budapest, Hungary; and the Department of Economics at the University of L6di, in Poland. The research projects are supported with funds generously provided by: The World Bank Research Committee; The Japanese Grant Facility; The Portuguese Ministry of Industry and Energy; The Ministry of Research and Space; The Ministry of Industry and Foreign Trade, and General Office of Planning in France; and the United States Agency for International Development. The Research Paper Series disseminates preliminary findings of work in progress and promotes the exchange of ideas among researchers and others interested in the area. The papers contain the views, conclusions, and interpretations of the author(s) and should not be attributed to the World Bank, its Board of Directors, its management or any of its member countries, or the sponsoring institutions or their affiliated agencies. Due to the informality of this series and to make the publication available with the least possible delay, the papers have not been fully edited, and the World Bank accepts no responsibility for errors. The authors welcome any comments and suggestions. Request for permission to quote their contents should be addressed directly to the author(s). For additional copies, please contact the Transition Economics Division, room N-11-065, World Bank, 1818 H Street, N.W., Washington, D.C. 20043, telephone (202) 473-1442, fax (202) 522-1151 or 522-1152. 1 The authors gratefully acknowledge financial support from the Henry Luce Foundation. Rawski received support from the John Simon Guggenheim Foundation and the Senior Fellowship Program of the University of Pittsburgh's University Center for International Studies. Jefferson acknowledges support from the Brandeis University Mazer Fund. This paper also benefitted from the authors' association with the World Bank's project on Industrial Reform and Productivity in Chinese Enterprises and with the Harvard Center for Textile/Apparel Research. i I. INTRODUCTION Economists typically conceive of innovation in terms of technological or managerial changes that expand the technical possibilities of individual firms or whole industries. These shifts take place against a background of assumed stability in the basic objectives, behavior and organization of the firm and the institutional environment in which it operates. Yet, the basic purpose of economies moving from central planning to a market system is to alter these basic conditions; hence, the assumption of institutional stability within and outside the fimn is not tenable in economies undergoing system reform. We see the conventional approach as a special case of a more general situation in which enterprise operations are constrained within separate choice sets established by technical and institutional conditions. In any economy, the technical frontier may exhibit the standard properties of production frontiers. Within established market economies, firms may face a relatively homogeneous set of institutional conditions determined by law, regulation and custom. Moreover, the institutional frontier defined by these conditions may not substantially limit the capacity of firms to adopt techniques which lie at the technical frontier. Within transitional economies, however, we encounter two distinctive conditions: Institutional conditions in centrally-planned or semi-reformed economies prevent firms from adopting resource combinations or production techniques that are technically feasible, and The industrial sector contains a heterogeneous mix of enterprise types, including state-owned firms at various stages of reform, collectives, private firms, and joint ventures involving foreign and domestic partners. Each type of enterprise is likely to confront a different sort of institutional frontier. Beginning with the idea of distinct technical and institutional frontiers, we introduce the notion of "innovation ladders," which extends the concept of "quality ladders" developed by Grossman and Helpman (1991). The individual rungs of the innovation ladder are defined by firms of different ownership types. Grossman and Helpman present a model populated by innovative firms in the North and imitators in the South. Northern firms rely on product innovations to support their high-cost manufacturing operations. Southern firms, with lower production costs, can capture markets from Northern rivals if they succeed in replicating Northern products. The North retaliates with a fresh round of innovation. Our study of China's textile industry reveals a longer ladder that includes not only Northern best practice and Southern imitators, but also multiple layers of domestic firms within the Southern economy, in this case, China, each facing different technical and institutional frontiers, and each displaying its own unique set of enterprise objectives, behavior, and performance. In China's textile industry, the innovation ladder includes 1 2 Institutional Change and Industrial Innovation in Transitional Economies overseas (Northern) firms at the top of the ladder, followed different groups of enterprises within China: joint ventures, state-owned enterprises (SOEs), urban collectives, rural collectives known as township-village or TVE enterprises, and private firms (mostly individual household producers). We see institutional frontiers and innovation ladders as representing a model of dynamic technological and institutional change in transition economies. Technological change travels down the ladder from foreign firms, joint ventures and SOEs to "lower-level" enterprise types, while cost-reducing competitive pressures travel up the ladder from the household and TVE sectors (and perhaps down from the international sector). Upper-level firms introduce new products and processes, while lower-level enterprises imitate. Lower-level Chinese firms face relatively few institutional constraints. This freedom often translates into lower manufacturing costs. The appearance of low-cost replicas of products introduced by joint ventures or state enterprises threatens to erode the market share of upper-level firms unless they can respond with further product innovations or cost reductions. This competitive process creates pressures on governments to relax the institutional constraints that prevent upper-level firms from realizing their full technical potential. We thus see an interactive process in which partial reforms, which relax specific institutional restrictions on a single group of fimns, encourages economizing behavior (cost reduction, product imitation) by reform beneficiaries that erodes the financial position of other firms, which then intensify their own efforts to create new products, reduce costs and maintain market share, in part by demanding further progress in dismantling institutional restraints inherited from the socialist plan system. The present paper uses this framework to analyze the forces driving the technological and institutional transformation of China's textile and apparel industries. We begin with a more complete description of innovation ladders and then provide a brief description of China's textile and apparel industry during the past decade. We then use examples from the recent experience of China's textile and garment industries to illustrate the value of our analytical approach in thinking about technical progress and institutional reform in transitional economies. II. INsTnu ONAL FRONTERS AND INNOVATION LADDERS The technical frontier used in production theory is a catchall concept. The neoclassical approach buries institutions in the background, assuming that the constraints to improved efficiency are technical rather than institutional. While perhaps a tolerable assumption in industrial market economies, the blurring of technical and institutional change is not appropriate in the context of transitional economies. We distinguish between the technical and institutional frontiers that constrain the objectives, behavior and performance of industrial enterprises in transition economies: Institutional Change and Industrial Innovations in Transitional Economies 3 The technical frontier embraces the standard idea that the firm has a set of product design and production techniques available to it (including knowledge and experience). Institutional frontier delineates the set of institutional arrangements that are available, i.e. permissible under prevailing law and regulation. The key point here is that, in the context of socialist systems and transitional economies, institutional restrictions prevent the implementation of large numbers of technically feasible options. The institutional constraint is often binding in the sense that relaxing institutional restrictions would reveal newly feasible techniques that dominate actual choices made in the absence of institutional change. Even if we make the distinction between separate technical and institutional frontiers, the whole frontier idea may be unsuited to transitional economies because it depends on the idea that all enterprises within the system operate under the same set of technical and institutional constraints. But our empirical study reveals multiple dimensions of heterogeneity that constitute a central feature of China's industrial economy. The stark contrast between pockets of high technology and primitive manufacturing methods within the same industry indicates a degree of heterogeneity that is not captured by the notion of moving along a smooth isoquant or operating inside a technical frontier. It is possible that the variation across enterprise types in terms of technical opportunities may not be much larger in China than in other developing economies, so that the conventional notion of a technical frontier may retain some value. The degree of institutional variation across enterprise types, however, is so large that we must reject the notion of a smooth and continuous institutional frontier that uniformly constrains the efficiency of all firms in even a single branch of Chinese industry. Unlike the circumstances observed in advanced market economies, where most firms operate under a similar set of laws, regulations and customs, different groups of Chinese firms operate under different institutional regimes. With heterogeneous institutional frontiers, we can anticipate the existence of production tiers or ladders within specific industries like cotton textiles or men's shirts. Within each product group there are several classes of enterprises, each characterized by a unique set of institutional arrangements, and each representing one rung of a product ladder. In the case of China, for example, these enterprise types, or rungs, may include foreign firms, joint ventures, state-owned enterprises, urban and rural collectives (including township-village enterprises), and individual household producers. This stratification of enterprise types is shown in Figure 1. As noted above, our idea of a layering of enterprise types, innovation and reform builds on the concept of quality ladders developed by Grossman and Helpman (1991). As in their analysis, new products and technologies move down the ladder from the overseas firms to joint ventures, SOEs, urban and rural collectives, and individual household producers, 4 Institutional Change and Industrial Innovation in Transitional Economies while pressures for cost reduction in the manufacture of established products move in the opposite direction. As technologies move down the ladder, enterprises occupying the lower rungs tend to shift toward the technical frontier. As competition moves up the ladder, pressures mount to expand both the technical and the institutional frontiers of enterprises at the upper levels. We offer two specific extensions of the original model: (i) ladders are extended from the simple North-South dichotomy to include the heterogeneity of industrial production within the domestic reform economy; and (ii) cost-reducing competition not only inspires new rounds of innovation and cost-cutting among enterprises at the upper-levels, but also deepens reform by motivating incremental relaxation of institutional constrains that limit the effectiveness of innovation efforts near the top of the domestic product ladder. This characterization of innovation and reform emphasizes the interaction between technical and institutional frontiers. As institutional constraints are relaxed at the bottom of the ladder (e.g. allowing TVE firms to hire farm workers and to sell garments in urban markets), enterprises further up the ladder face mounting competitive pressures. These pressures, in turn, require enterprises situated further up the ladder to innovate. This innovation may take the form of technical improvements, such as quality upgrading or new products, or institutional changes such as strengthening incentives or securing greater autonomy. In China, erosion of the long-standing monopoly rents enjoyed by government-owned enterprises undercuts the financial position of the state, which also finds itself under pressure to initiate or sanction institutional reform. Alternatively, as new technologies migrate down the ladder, local enterprises find it difficult to take advantage of new opportunities without greater specialization, expanded operational scale, new systems of management or R&D, and improved access financial markets. These new requirements often bump up against institutional constraints, which then forces institutional reform onto the agenda of local governments that depend on these industries to provide employment and revenue. In short, lower-level firms may find it difficult to adopt new technologies from above without shifting out their institutional frontiers. This model of interactions between technical innovation and institutional reform describes a kind of virtuous circle in the transition process. The model illustrates possibilities for endogenous reform and endogenous technical change. An initial technical innovation that travels down the ladder and is imitated by low-cost producers creates competitive pressures which move back up the ladder and induce new rounds of technical innovation and institutional reform. Alternatively, the virtuous circle of change can be initiated by an initial reform which shifts out the institutional frontier of a particular enterprise type, causing existing a wider range of techniques to become attainable under the Institutional Change and Industrial Innovations in Transitional Economies 5 liberalized institutional regime. Enterprises employing these new techniques become targets for imitators occupying lower rungs on the ladder, while successful imitation initiates cost-reducing competitive forces that are transmitted back up the ladder. In the middle of this international innovation ladder, China's state-owned firms find themselves subject to pressures from overseas producers as well as the domestic non-state sector. Facing competition from two directions, these firms find that their short-term financial health and perhaps even their long-term viability depend on their ability to innovate and reform - i.e. to stretch both the technical and institutional frontiers. III. CHINA'S TEXTILE INDUSTRY DURING THE REFORM PERIOD During the era of socialist planning - roughly from the early 1950s to the late 1970s - planners treated China's textile industry differently from many other branches of industry. Its primary contribution to the national economy was seen in terms of funds contributed to the government's budget rather than in terms of output or expansion of capacity. Ironically, the reform period transformed the textile sector into an industry bent on massive capacity expansion of the sort widely associated with enterprise behavior under planning. Why this costly rush to invest? China's initial reforms focused on two areas: agriculture and international trade. New policies in both these areas generated sharp increases in demand for textiles and clothing. Rapid increases in rural output and incomes greatly expanded and upgraded the demand for fabrics and garments that were already available in Chinese markets. At the same time, the relaxation of informal controls on attire and a flood of information about fashions in Hong Kong, Taiwan, Japan, and the West revolutionized the demand for clothing in China's cities. Furthermore, the "open door policy" allowed Chinese producers to exploit a latent but untapped capacity to increase exports of textiles and clothing. Producers sensed huge profit opportunities for textiles and garments that met high quality standards. These demand-side factors, coincided with massive increases in the domestic production of natural and artificial fibres. Several other supply-side influences reinforced the desire for capacity expansion. These included (i) unprecedented access to the international market for textile equipment, which is widely regarded as far superior to domestic alternatives; (ii) low domestic interest rates, and (iii) the expectation that future currency devaluation was likely to escalate the cost of imported equipment. All these factors stimulated a race for capacity expansion. The consequences can be seen in the rapid growth of fixed assets (Table 1, Lines 10, 11). The combination of growing capacity and increasing domestic market integration produced a sharp intensification of market competition. With capacity growth running ahead of demand and competition on the rise, manufacturers of textiles and garments were forced to slash profit margins. 6 Institutional Change and Industrial Innovation in Transitional Economies The consequences are clearly visible in Table 1, which presents a summary of data on urban-based textile producers (excluding rural industry and the apparel sector) for 1980-91. Profit rates, expressed as percentages of sales, output, total capital, or production costs (Lines 26-29, 35 of Table 1) drifted downward throughout the decade. We may briefly summarize the experience of China's textile industry since 1980 in the following terms: output grew rapidly (Table 1), supported by increased domestic sales and a massive export spurt which carried overseas sales of textiles and apparel to nearly US$30 billion in 1992. The size and speed of this export spurt can be seen by noting that China's exports of all industrial products totalled US$9.0 billion in 1980 and US$13.5 billion in 1985 (Yearbook 1993, pp. 634-37). capacity increased rapidly, as shown in Table A by a three-fold increase in spindles, a four-fold increase in looms and a six-fold increase in the capacity of the chemical fibre industry. despite the installation of large amounts of domestic and imported equipment, labor productivity rpse at a slow pace (Table 1, Line 33) and multi-factor productivity growth, although positive, lagged behind the industry-wide average (Table 2). the financial condition of enterprises varied substantially by product group and ownership type. Disaggregated data from the source cited in Table 1 shows a high incidence of losses in ramie and cotton textiles; the lowest incidence is in chemical fibres. These data also show that the highest incidence of loss-making enterprises is in the collective sector, followed by state-owned enterprises and "other" enterprises (including joint ventures and private firms). In summary, we see that modest productivity growth and deteriorating financial performance are largely attributable to overexpansion of capacity that has contributed to the intensification of competition in domestic product markets. IV. INSTrTHmONAL FRONTIERS IN CHINA'S TEXTILE INDUSTRY The idea that institutions affect economic performance is not new (North 1990). Implicitly or explicitly, this idea has appeared in empirical literature regarding China's economic reforms. Groves et al (1994) examine the impact of enhanced enterprise autonomy on productivity behavior. McMillan et al (1989) estimated an "institutional production function" for Chinese agriculture. Looking specifically at textile-related production, the reversion from collective to household farming raised China's cotton yields by two-thirds despite substantial reductions in labor input (Yearbook 1993; Rawski and Mead 1993). Cheung, Archibald and Faig (1993) implicitly assume the existence of an institutional frontier Institutional Change and Industrial Innovations in Transitional Economies 7 defined by the different economic "regimes" governing China's cotton yarn industry between 1922 and 1986. As previously asserted, different sectors face different institutional frontiers. We illustrate this point by focusing on state-owned and TVE firms, the two largest sectors in Chinese industry. Prior to the reforms, obstacles to innovation in all types of Chinese firms included: incentives: weak material incentives for innovating and implementing profitable innovations; no "invisible foot" (Berliner 1976) punishing failure to innovate; autonomy: hard to introduce new products because of restrictions on retiring old products and on marketing beyond local and regional boundaries; and resources: the absence of markets created difficulty in procuring complementary inputs needed to pursue innovation. State-owned enterprise: Prior to the initiation of reform, and even in the initial stages of reform, the autonomy of Chinese industrial managers was hedged with so many institutional limitations that Komiya (1987) concluded that the typical enterprise "can hardly represent a 'firm' in the accepted sense of the term" from the perspective of microeconomic theory. Enterprises received specific instructions about the quantity and variety of output and of inputs of labor, energy, and materials. Material inputs were supplied at fixed prices by designated suppliers; outputs were delivered in similar fashion. There was often no direct link between suppliers and customers. Any significant investment project required detailed official scrutiny. Financial surpluses arising from profits or depreciation funds were delivered to the state, which supplied the funds needed for wages, working capital, and investment spending. Strategic planning of mergers, market penetration, etc. was virtually impossible. Reform has gradually eliminated many, but not all of these restraints. Jefferson and Rawski (forthcoming) identify substantial changes in the structure of Chinese industry and evaluate how the relaxation of institutional constraints has affected the conduct and performance of state enterprises. Enterprise panel data for the 1980s reveal statistically significant and increasingly robust relationships between gross and retained profits, wages and labor productivity, bonuses and profits, and profits and capacity expansion. Despite these changes (and as predicted by the model described above) factory interviews conducted in the late 1980s found managers and technical staff at large state-owned enterprises continuing to be voice frustrations about institutional barriers to innovation. These included the inability to drop old products, enter new lines of business, and independently export. Interviews conducted in 1993 with the same enterprises or enterprises in the same product groups indicate that some of these restrictions have been 8 Institutional Change and Industrial Innovation in Transitional Economies dropped or considerably relaxed. Still, managers in the state sector feel that, on balance, they are operating at a competitive disadvantage relative to the non-state sector. They see the competitive efforts of their own firms as stifled by institutional constraints that their domestic rivals are able to escape. Township-Vilage Enterprises: Rural industry developed extensively prior to the onset of reform (Perkins et al 1977), but was largely excluded from access to scarce commodities or services (rail transport, foreign exchange, college graduates, highly skilled technicians) allocated through the plan system. As a result, rural firms were typically limited to using local resources to serve local markets in what Donnithorne (1972) described as "China's cellular economy." Beginning around 1978, reforms expanded the access of TVE producers to external sources of labor, materials, funds, technical knowledge, and equipment, and simultaneously expanded opportunities for TVE producers to penetrate product markets beyond local boundaries. TVE producers, especially in relatively prosperous coastal and periurban regions, were poised to take advantage of new opportunities. The result was a swift expansion of output. Relaxation of restrictions on interenterprise transactions by SOE firms was of great benefit to TVE enterprises, which quickly formed investment, technology transfer, supply, marketing, and subcontracting links with urban SOE firms. Moreover, a general erosion of state control permitted TVE firms, already the beneficiaries of concessional tax rates, to lower costs through rampant tax evasion (Gu and Cao 1993). Reform also tilted the weight of fiscal authority and regulatory power from the central government toward authorities at the central and local level. Lower-level governments have become enmeshed in fierce economic competition that has led them to focus on growth-oriented policies of the type associated with the national leadership of "development states" elsewhere in East Asia. Beginning in the mid-1980s, a succession of policy announcements extended the range of market economy patterns deemed legitimate in China's "socialist market economy." In the urban sector, there was often a lengthy gap between enunciation and implementation of policy principles. Joint stock financing (Zhu 1989) and dismissal of underperforming or redundant workers (Byrd 1992) serve as examples of reforms that spread much more rapidly in rural than in urban industry, enabling rural enterprises to push out the institutional envelope more rapidly than their urban counterparts. The geographic and administrative distance separating rural firms from official arbiters of economic behavior encourages TVE managers and local officials to embark on unauthorized or even illegal ventures in the expectation that these activities are unlikely to be discovered before reform progresses sufficiently to eliminate any aura of illegitimacy. Institutional Change and Industrial Innovations in Transitional Economies 9 V. INNOVATION LADDERS IN CHINESE INDUSTRY The model of an innovation ladder developed above fits nicely with our observation of recent developments in China's textile and apparel industries. The transnational interactions discussed by Grossman and Helpman are themselves connected to a domestic quality ladder containing several steps or rungs, each corresponding to firms with rather distinct levels of technical sophistication, product type and labor cost. As in the model of Grossman and Helpman, the existence of different types of enterprise creates profit opportunities for entrepreneurs who succeed in moving the manufacture of specific goods to a lower rung of the ladder. This threatens the viability of higher-level producers of these goods, adding intensity to their search for innovations that perpetuate profitable high-wage manufacturing operations in the upper reaches of the quality ladder. As related to China, the innovation ladder includes several tiers. These are shown in Figure 1. As in the case of international ladders, the rank ordering of product quality, technical sophistication, and labor costs coincides. Table 3 shows the descending progression of wages within the joint venture, SOE, UCOE, TVE sectors. A. Joint venture firms, especially in the south. Their technologies, equipment, and product standards are vi-itually dictated by the international market. One example is Giordano, a Hong Kong-based clothing retailer that procures garments in China. Giordano has developed a "real-time computer system which informs factories in China the moment a purchase is rung up." This information network "is probably the best in Asian retailing. It makes restocking quick and efficient," apparently because the Chinese garment manufacturers linked to Giordano have mastered the art of flexible production [Clifford 1993a] B. State-owned enterprises. State-owned enterprises fall into different categories according to their market orientation. Within the textile industry, export-oriented SOEs like the Beijing #2 and #3 cotton textile factories use a blend of domestic and imported equipment to provide yarn and cloth to the international market, often selling through intermediaries. They are not as closely linked to international markets as the joint venture firms, nor is this essential, as they are producing standard textile products rather than style-influenced apparel. However interviews do indicate that their ignorance is costly, as is the limited range of their technical knowledge and equipment. For example, first-class raw materials are often fabricated into low-quality goods that suffer substantial price penalties in world markets [Textile Yearbook 1992, p. 20] C. SOEs oriented primarily toward domestic customers are indirectly linked with the world market through domestic demand pressures. The general public, influenced by television, advertising, travel experience, observation of consumption habits by overseas Chinese and other foreigners, demands fashions that reflect international styles and quality. Rising consumer expectations put pressure on domestically-oriented SOEs to innovate new 10 Institutional Change and Industrial Innovation in Transitional Economies products and upgrade the quality of standard lines. That SOEs remain a locus of technical innovation is shown by 1991 survey data that show that within the cotton textile, electronic components and machine-building industries, SOEs are widely viewed as being at the technical frontier. Over ninety percent of respondents in SOEs, urban collectives, and TVEs identified state-owned enterprises as the most innovative in their product line. D. Urban collectives produce mainly for domestic consumption, but with some export production. The ladder of quality and labor cost is explicitly recognized by informants in the industry, who point out that in terms of quality, "urban collectives can't keep up with the state firms, and TVE enterprises cannot match urban collectives." In terms of production cost, however, the same observers report that "urban collectives can't match the TVEs, and state firms can't match urban collectives" (Jefferson, Rawski and Zheng, 1992). E. Rural collective (TVE) firms have the greatest flexibility and the lowest costs. They too produce mainly for the domestic market. Some pockets of concentrated export production - especially Beijing, Tianjin and Shanghai-Jiangsu-Zhejiang plus Guangdong; these jurisdictions accounted for 80.0 percent of textile exports and 81.6 percent of garment exports from the TVE sector in 1989. Since exports amounted to 10.3% of TVE textile output and 27.8% of TVE garment production in 1989, it is clear that output of TVE textile and garment makers in other localities is overwhelmingly directed toward the domestic market [data from Rural Industry 1990, pp. 154, 171-172]. F. Individual household producers. Because Chinese statistical sources group these producers in the residual (qita) category, we do not know much about these firms. While not substantially involved in the manufacture of fabrics, individual households appear to manufacture substantial quantities of garments, often using household sewing machines or used industrial sewing machines. VI. MOVEMENT OF TECHNOLOGIES DowN THE LADDER How does technology move down the ladder? Within China's domestic textile and garment industry, we highlight several channels through which technologies move from upper to lower levels of the ladder. These include: A. International "just-in-time" production schedules move down the ladder. The Giordano example provides one of many indications that exposure to international markets is increasing pressures to speed up the pace of activity throughout China's textile complex. Giordano's retail operations in China are struggling to overcome "a minefield of costs," including merchandise deliveries that are "often erratic, tying up working capital" [Clifford 1993b]. China's state-run trading companies are now pressing textile makers to reduce their Institutional Change and Industrial Innovations in Transitional Economies 11 delivery time [interview 6-24-93]. B. Quality standards move down the ladder. The growth of export activity, along with the more general process of economic opening, has revolutionized domestic demand for textiles and clothing. Beijing textile executives report that upper-income urban consumers insist on quality levels equivalent to export requirements [interview xxx]. But tastes are also changing in rural areas, which affects the production and marketing requirements of rural-based enterprise. Village men on short-term forays into cities often wear western-style sport jackets, indicating that styles intended for urban white-collar consumers have attracted the interest of tailors and seamstresses in rural China. C. Equipment moves down the ladder. Export-oriented producers have purchased huge amounts of imported equipment for the manufacture of fabric and garments. Urban and rural collectives often begin production with outdated equipment transferred or sold by larger urban firms [e.g. interviews 6-22 and 6-24-1993] or manufactured by low-end domestic suppliers. A major TVE garment producer on the outskirts of Beijing was set up with equipment, managers and technicians from an established state-owned enterprise. The township contributed land and low-cost labor. D. Technical expertise moves down the quality ladder. Beginning in the mid-1980s, engineers and technicians working in the state sector were permitted to retire from their posts and begin second careers as employees or consultants to collective enterprises. "Sunday engineering," a term used to describe spare-time consulting work by currently employed specialists, also became popular. Cash-starved universities have begun to sell admission slots to rural enterprises that pay tuition and fees for students who promise to work for their sponsors after graduation. At the same time, the government has slashed its financial support for research organizations in an apparently successful effort to redirect the energies of China's research establishment from academic to commercial projects. As a result, the collective sector, especially in rural areas, has begun to overcome its long-standing inability to acquire the skilled personnel and technical information required to compete with urban-based producers. Survey information collected in the late 1980s produced the surprising result that the financial returns to employing "technicians above the intermediate level," measured in terms of the profitability of new products, are nearly identical in the SOE and TVE sectors [Jefferson, Rawski, and Zheng 1992]. These data indicate a surprising level of permeability between the state and non-state sectors, as styles, just-in-time production requirements, equipment, and technicians spill from the urban-based textile and garment producers into rural areas. 12 Institutional Change and Industrial Innovation in Transitional Economies VII. MOVEMENT OF COST-REDUCTION PRESSURES UP THE LADDER At the beginning of the reform period, the state exercised a virtual monopoly over industrial production. As it relaxed controls over production, the number of industrial enterprises mushroomed from 294,000 in 1976 to 8,080,000 in 1991, greatly expanding the scope and intensity of competition with the industrial sector. This rapid expansion of the non-state sector and rising competition has severely eroded the monopoly profits which the state sector enjoyed during the late 1970s and early 1980s. Table 1 (line 29) shows that among urban textile enterprises (principally SOEs), from 1980 to 1989, the profit rate (measured as profit plus tax as a percent of net fixed assets plus circulating capital) fell from 67.5 in 1980 to 17.2 in 1989. Using data for 28 provinces during 1984-89, Singh and Ratha (1993) find rapid growth of industrial production outside the state sector (a close proxy for competition) is associated with rapid decline of profitability in the state sector. Specifically they found that a one percent increase in the growth of the non-state sector resulted in a decline of 0.29 percent in the profitability of state industry. Since textiles and garments are both areas in which output by collective firms has grown rapidly, we anticipate that competition from fast-growing producers in the TVE and household sectors has contributed to the decline of profits among SOE producers of textiles and apparel. Ample profit opportunities for firms at the bottom of the cost-quality ladder persist, partly because of lower costs, including the absence of social obligations, partly because domestic markets remain partially segmented, and partly because there is still an enormous market for inferior goods. The majority of rural firms that cannot obtain the funds needed to obtain high-quality equipment are compelled to compete on the basis of price rather than quality, pushing the state firms to upgrade product quality and expand variety [interview 6-22-93] through exactly the same mechanism that links garment producers in China and the United States in the analysis of Grossman and Helpman (1991). But China's rural textile and garment producers have no intention of continuing to specialize in inferior goods. A 1990 report summarizes the aspirations of TVE producers in the textile and garment sectors [Rural Industry 1990, p. 31]. According to this source, TVE producers reported that they were adopting the following business strategy: Taking new products as the leading element, push to improve the product mix... . Develop medium and high-class products that are suited to the demand of the urban market and can be exported to earn foreign currency, while continuing to open up the rural market. . . . In order to meet the demand of the two great markets - domestic and international - many firms shift from single products to whole ranges of products. . . from ordinary products to brand-name, special, or excellent products and exportable goods Institutional Change and Industrial Innovations in Transitional Economies 13 TVE producers now use mergers, stock issuance and other new arrangements to raise funds, increase efficiency, and strengthen competitiveness. Some TVE firms, especially in the southern coastal provinces, are using foreign joint ventures to push into markets for medium and high-quality fabrics and garments. SOE firms dominated textile production through the late 1970s. Since then, competition from new entrants has eroded their market share. In 1991, collective textile producers outnumbered state firms by 6:1; collectives, in turn, were dwarfed by a huge number of (very small) household producers. State firms continue to produce about one-half of China's total output of textiles. Strenuous competition continues. A Beijing textile executive predicts that one of the city's three large textile firms will fail within the next five years (interview). VIII. DYNAMuc TRANSFORMATION IN CHINESE INDUSTRY We have examined differences among the institutional frontier confronting various levels of Chinese industry as well as the distribution of technological capabilities across different enterprise types. We now seek to demonstrate how technical innovation and cost-cutting competition interact to create pressures for institutional reform within China's textile and garment industries. We have seen that reform has accelerated both competition and technical innovation within the textile and garment industries. How does competition in turn engender reform? Competition engenders reform at two levels. It affects the behavior and performance of firms; it also affects the behavior of governments that oversee enterprises and are responsible for sanctioning reform. At the level of the firm, competition affects the conduct and performance of enterprises. Firms that compete successfully tend to be rewarded and to grow most rapidly. Specifically, empirical studies of bonus and investment behavior in state industry yield the following findings: a significant relationship between profitability and bonuses within the state sector. (Jefferson and Rawski, forthcoming). Rawski (1994) shows that this relationship is robust in both the textile and apparel industries. a significant relationship between profitability and the rate of growth of fixed assets. Using samples of enterprises in both the textile and apparel industries, Jefferson, Ratha and Singh (1994) find that rates of capacity growth are significantly affected by profit rates in the previous period. Both these statistical results and on-site interviews indicate that firms, managers, and workers have high stakes in improving performance. Layoffs are rare in the state sector, but 14 Institutional Change and Industrial Innovation in Transitional Economies workers can be furloughed, in which case they typically receive 75 percent of their base wages but no bonus payments. Another response to financial adversity is to pay workers in kind. Workers at loss-making state firms may be deprived of fringe benefits -- e.g. hospitals may require cash payment and leave patients to seek reimbursement from their employers. As owners who are ultimately responsible for the financial condition of the state and collective enterprises they supervise, various units of government also have a stake in the efficiency and financial performance industrial firms. Virtually all state-owned enterprises in the textile and apparel industries are managed by provincial or municipal governments that cannot use the power of seigniorage to finance the losses of enterprises under their jurisdiction. As a result, rising losses increase pressures for substantive reform. Falling profits in the textile sector have compelled the state to progressively abandon or curtail subsidies and other costly forms of regulation. Thus we see major decontrol of prices in 1992-93 and.declining shares of allocations of raw cotton and wool fibre. Other responses include the following: creating service companies to provide social and business services on an independent financial footing. Workers now performing these functions are being removed from the payrolls of textile factories and reassigned to these service companies which are expected to provide services on a competitive basis. hardening budget constraints. Initiatives include the requirement that enterprises contribute 15 percent from retained earnings of the cost of investment projects. Also, government subsidies as a share of total losses has been declining, as enterprises are increasingly having to finance losses through commercial sources. forcing research institutes to focus on commercially-relevant applied studies by slashing their budget grants. enabling exporters formerly tied to monopsony trading firms to pick and choose among any trading company with quota allocations. Within some sectors of the textile industry that are not subject to international export quotas, enterprises have become completely free to sell directly to foreign markets. Interviews with factory managers during the 1980s showed this restriction to be a major area of frustration, since, among other reasons, it interfered with their ability to meet directly with foreign customers to assess their needs and explain the capabilities of their production facilities. In 1990-91, large inventory accumulations and losses within the woolen textile industry, attributable in part to competition unleashed by previous reforms, led government to enable woolen textile companies to export directly to overseas customers. The effect of direct marketing was to cause Chinese producers to Institutional Change and Industrial Innovations in Transitional Economies 15 produce semi-finished products that could be more quickly converted into final goods that conformed with the specifications of orders and just-in-time production requirements of overseas customers. Through the mid-1980s, managers of state-owned enterprises would invariably prefer their status to their counterparts in TVEs. Beginning in the late 1980s, interviews with factory managers revealed that an increasingly large proportion had come to feel that relative to their competitors in the non-state sector, the disadvantages of state ownership had come to outweigh the advantages. Managers in the state sector have become active agents for reform demanding further institutional reforms to create a "level playing field" in China's domestic markets for textiles and other industrial goods. State firms complain of being burdened with a variety of cost-inflating obligations that TVE firms and joint ventures often escape. These include high taxes, stifling regulation, surplus workers, and responsibility for pensions, medical costs, housing expenses, and other social welfare expenses. These complaints, along with the slow growth of central government revenue -- itself largely a consequence of rising competition in industrial product markets -- are the main forces driving China's government to implement the current new round of market-oriented reforms. A second type of government-sanctioned response to growing competition within the industrial sector is change in the ownership status of state-owned enterprises. At the local level, this typically occurs in one of two ways: selling state enterprises, particularly chronic loss-making enterprises. Recently, within increasing frequency local governments have been selling off enterprise. During 1993, reports of sales included Changzhou City (which sold 40 of its 41 SOEs), Wuhan, Harbin, and Sichuan Province. SOEs seeking foreign firms with which to establish joint ventures. Such ventures are in the interest of SOE managers since these result in tax benefits for the enterprise and more managerial autonomy and the termination of outright subsidies for local governments. This latter reform response is distinctive in that it results in the movement of existing state-owned enterprises up the innovation and reform ladder. By shifting out the institutional frontiers of these enterprises, their ownership change creates still more competition for the remaining state-owned enterprises. Increasing competition from above and below state industry, and the reforms which have ensued, is also motivating technical innovation within state-owned textile enterprises. In a sample of state-owned enterprises that includes a large number of textile enterprises, the share of new products in the total value of output rose from 13 percent in 1980 to 24 percent in 1989. Efforts to introduce more variety and flexibility of product mix in the state-owned textile sector are leading to large volumes of imported equipment. Based on available monthly data for 1993, the total value of equipment imports for that years may have exceed 16 Institutional Change and Industrial Innovation in Transitional Economies the total value of the total stock of equipment on hand in 1985. These investment are accelerating the pace of technical change in the state textile industry, the principal (immediate) source of new product innovation among China's domestic textile producers. As the state sector expands the stock of new technologies, both new product innovations and newly imported equipment, opportunities grown for the transmission of these technologies through innovation and used equipment sales to lower-levels of the innovation ladder. The erosion of the special status of state-sector workers, including the decline in differential rates of wages and labor productivity, between state and non-state enterprises, also creates further incentives for technicians to move to the non-state sector or to provide consulting services to non-state enterprises. As new technologies move down the ladder, the ability of the non-state sector to expand competition grows, placing still more pressure on the state sector to innovate and reform. IX. CONCLUSIONS AND AGENDA FOR FURTHER RESEARCH Fifteen years of reform have moved Chinese industry substantially along the path of transition toward a market system. China's textile and garment producers are important participants in the reform process. These industries have experienced large increases in production, capital stock, export sales, and technical capabilities. While all segments of the industry have participated in these developments, the most rapid progress has occurred among joint ventures and rural collectives, which have increased their share of textile and garment production at the expense of the previously dominant state sector. The reform process in China's textile and garment industries has brought institutional change and institutional heterogeneity on a scale that persuade us of the need to move beyond conventional production theory (including both neoclassical and evolutionary versions) to understand the interaction between institutional change and technological development. We see nothing special about China's textile and apparel industries in this respect. We have no doubt that similar conclusions would follow a review of recent experience in most of China's major industries. We suspect that the same is true of other transitional economies. We propose to investigate the interplay of institutional change and technological development with a model of innovation ladders that enriches the contribution of Grossman and Helpman (1991) by positing distinct layers of enterprises in the low-income follower nation, each with unique technical and institutional attributes, and each playing an important and distinct role in a succession of institutional and technical innovations. This model encompasses endogenous processes of institutional change and technical development. In considering its potential to deepen our understanding of China's recent industrial experience, we focus on the potential for a virtuous circle in which a partial Institutional Change and Industrial Innovations in Transitional Economies 17 removal of institutional constraints stimulates technical change, which, via the normal process of competition, generates pressures for further increments of technical and institutional innovation. This initial excursion convinces us that the innovation ladder concept provides a valuable tool for analyzing important features of China's reform accomplishments. The model may also help to explain instances of failure, if institutional rigidities stifle technical change, if competition takes the form of obstructing the development of competitors rather than innovation, or if premature institutional reform creates perverse opportunities for profitable manufacture of technically deficient capital goods. These possibilities must await further study. 18 Institutional Change and Industrial Innovation in Transitional Economies REFERENCES Berliner, Joseph, 1976. The Innovation Decision in Soviet Industry. Cambridge: MIT Press. Byrd, William A., 1992. "Chinese Industrial Reform, 1978-89." In Chinese Industrial Firms Under Reform, edited by William A. Byrd. New York: Oxford University Press, chap. 1. 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Quarterly Journal of Economics vol. 106, pp. 557-586. Groves, Theodore et al 1994. "Autonomy and Incentives in Chinese State Enterprises." Quarterly Journal of Economics, forthcoming. Gu Shutang and Cao Xuelin, "Create the Circumstances to Overcome Difficulties: On Enlivening State Enterprises to Escape Contradictions." Jiage lilun yu shijian (Price theory and practice), no. 2, pp. 12-17. Haiguan. Zhongguo Haiguan.tongii zhaiyao [Abstract of China's Customs Statistics; annual]. Beijing. Jefferson and Rawski (forthcoming) "Enterprise Reform in Chinese Industry," Journal of Economic Perspectives. Institutional Change and Industrial Innovations in Transitional Economies 19 Jefferson, Gary H., Thomas G. Rawski, and Yuxin Zheng, 1992. "Innovation and Reform in Chinese Industry: A Preliminary Analysis of Survey Data (2)," paper presented to a conference on "Productivity, Efficiency, and Reform in China's Economy," Chinese University of Hong Kong, August 1992. Research Paper Series, No. 30, Socialist Economies Reform Unit, Country Economics Department, World Bank (August 1992). Komiya, Ryutaro, 1987. "Japanese Firms, Chinese Firms: Problems for Economic Reform in China." Journal of the Japanese and International Economies 1.1 (1987): 31-61. Li Jingwen, Gong Feihong, and Zheng Yisheng, 1993. "Productivity and China's Growth, 1953-1990." In Li Jingwen, Zheng Yuxin and Hsueh Tien-tung eds., Zhongguo shengchanlt biandong qushi zhi yanjiu [Studies on the trend of productivity change in China]. Beijing: Shehui kexue wenxian chubanshe, pp. 1-27. McMillan, J., J. Whalley and L. Zhu, 1989. "The Impact of China's Economic Reforms on Agricultural Productivity Growth." Journal of Political Economy 97.4: 781-807. North, Douglass C., 1990. Institutions, Institutional Change and Economic Performance. New York: Cambridge University Press. Perkins, Dwight H. et al 1977. Rural Small-Scale Industry in the People's Republic of China. Berkeley: University of California Press. Rawski, Thomas G., 1994. "Progress Without Privatization: The Reform of China's State Industries," in The Political Economy of Privatization and Public Enterprise in Post-Communist and Reforming Communist States, edited by Vedat Milor (Boulder: Lynne Rienner, forthcoming). Rawski, Thomas G. and Robert W. Mead, 1993. "On The Track of China's Phantom Farmers," unpublished draft. Rural Industry 1990. Zhongguo xiangzhen qiye nianjian 1990 [Yearbook of China's township and village (TVE) industries, 1990]. Singh, Inderjit, D. Ratha and G. Xiao (1993) "Non-State Enterprises as an Engine of Growth," manuscript, Transition and Macro-Adjustment Division, The World Bank. Textile Data Book 1989, 1990, 1991. Fangzhi gongye zhuyao caiwu ziliao huibian [Compendium of major financial data for the textile industry]. Textile Yearbook 1992. Zhongguo fangzhi gongye nianjian 1992 [Almanac of China's Textile Industry 1992; Beijing 1992]. 20 Institutional Change and Industrial Innovation in Transitional Economies Wang Changyuan, 1993. Xianyfi jingii fazhan zhanlue [Economic development strategy for county regions]. Beijing: Zhongguo jingji chubanshe. Watson, Andrew et al, 1989. "Who won the "Wool War"? A Case Study of rural product marketing in China," China Quarterly no. 118, pp. 213-40 Wong, Christine P.W., 1986. "The Economics of Shortage and Problems of Reform in Chinese Industry,: Journal of Comparative Economics vol. 10, pp. 363-387 Yearbook 1993. Zhongguo tongii nianjian 1993 [China Statistical Yearbook 1993]. Zheng Yuxin, "Growth, Efficiency and Structural Change in Chinese Manufacturing Industries: 1980s." In Li Jingwen, Zheng Yuxin and Hsueh Tien-tung eds., Zhongguo shengchani biandong qushi zhi yanjiu [Studies on the trend of productivity change in China]. Beijing: Shehui kexue wenxian chubanshe, pp. 28-46. Zhu Gang, 1989. "90-niandai yanhai diqu xiangzhengongye fazhan zhanlue cankao" [Thoughts on development strategy for TVE industry in coastal areas during the 1990s]. Jingli guanli [Economic Management} no. 9, pp. 16-20 Institutional Change and Industrial Innovations in Transitional Economies 21 Figure 1 Production Ladders in China's Textile and Garment Industries foreign firms t 3 pressures creation of joint-venture enterprises for cost- new product reducing and process state-owned enterprises efficiencies innovations and institu- collectives tional reform (urban and rural TVEs) t It household producers t Principal Specialized Equipment in the Textile Industry 1952 1957 1965 1978 1990 1991 Unit g 561.00 755.60 980. 10 1561.92 3881.95 41IDl. 11 Cotton spindle 10000 spdls. WIM# - 42. 14 30. 92 49.65 86.04 90. 45 Cotton loom 10000 sets 12.31 15.62 27.98 47.81 265.87 303.02 Wool spindle 10000 spdis. %fAv1 1909 1830 4040 7120 33556 35128 Wool loom sets 6 1042 1418 1821 5725 16139 15528 Sacking loom sets *z * )TI 4.80 5. 40 7.65 15. 00 88.98 101. 34 Bast iber spindle 10000 spdls. X IEJ@9 )I 1.42 1.58 1.44 1.93 10.76 12.44 of which Flax spindle 10000 spdls. =xa,R )7 0.31 0.64 1.67 3.22 55.80 58.95 Ramle spindle 10000 spdls. AMM )T 16.72 20.56 26. 52 72.23 200. 00 234. 54 Mulberry silk filature 10000 ends MAT ft 4.42 3.09 2.67 4.54 17.96 17.21 Silk loom 10000 sets - 0. 03 6. 70 38. 10 202.45 226. 02 ChemIml fiber producing 10000 tons capacity 1 - 0.03 5. 10 13.38 21.73 23.60 of which% Rayon fiber 10000 tons J)a fi - - 1.60 24.72 180.72 202.42 Synthetic fiber 10000 tons - - - 68.66 129. 40 147.69 Cotton fabric printing and 100 million mers dyeing capacity S~ur.c ewh Yeov~ o.~- ~273 Notes to Table 1, Summary for China's Textile Industry, 1980-1992. This table excludes rural industry. It covers the urban textile sector (yarn, cloth, chemical fiber, textile machinery) but excludes garments, shoes, and hats. Except as noted, all variables are presented in units of 100 million yuan at current prices. Variable list: 1. number of firms (unit) 2. Gross output value (100 million yuan at 1980 prices) 3. Gross output value 4. Net value of output 5. Sales revenue 6. Tax and profit 7. of which: profit (i.e. profits net of losses) 8. Number of loss-making firms (unit) 9. Total losses of loss-making firms 10. Fixed assets - original cost (i.e. undeflated, undepreciated) 11. Fixed assets - net value (undeflated, but net of depreciation) 12. Year-end total of outstanding loans 13. Total working capital 14. Average amount of quota working capital 15. of which: xxx funds 16. of which: funds for stocks of final goods 17. Yearend outstanding loans for working funds 18. Enterprise year-end working funds (state grants plus own funds) 19. Turnover period for working capital (days) 20. Total cost for all products 21. Depreciation allowance 22. Major repair allowance 23. Profit retained by enterprises 24. Total wage bill 25. Average number of staff and workers (10,000 persons) 26. Ratio: (profit + tax)/sales (%) 27. Ratio: (profit + tax)/gross output (%) 28. Ratio: (profit + tax)/(original fixed assets plus working capital) (%) 29. Ratio: (profit + tax)/(net fixed assets plus working capital) (%) 30. Profit + tax per worker (yuan) 31. Retained earnings per worker (yuan) 32. Wage payments per worker (yuan) 33. Output per man-year (figures based on output value at constant prices) (yuan) 34. Annual percentage rate of cost decrease for comparable products (%) 35. Ratio: (profit + tax)/total cost (%) Table 1. Summary of China's Textile Industry, 1980 - 1992 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 number of firms 4120 4334 4508 4583 4638 4960 4962 5751 5852 5856 6133 6207 Gross Output value (100 million yuan at 1980 prices) 604.61 679.94 663.69 719.05 751.15 828.45 888.18 1038.17 1109.35 1110.55 1141.07 Gross Output Value 601.07 682.40 640.12 646.54 652.83 754.09 845.33 1058.54 1303.17 1554.81 1655.22 1787.74 Net value of output 223.79 270.42 319.47 384.27 402.51 460.57 Sales revenue 614.09 685.24 628.55 533.52 622.06 729.07 820.88 1048.13 1284.52 1403.85 1517.04 1670.70 Tax and profit 150.84 168.72 133.02 118.86 105.38 127.50 129.73 147.88 177.38 157.481 of which: profit (i.e. profits not of losses) 92.38 102.51 72.91 64.78 52.31 62.81 64.85 96.44 114.60 97.52 37.53 11.65 Number of loss making firms (unit) 205 268 530 404 630 399 488 479 366 607 2327 2604 Total losses of loss-making firms 0.22 0.39 1.17 1.00 1.54 1.10 2.06 2.15 1.86 6.02 32.82 43.42 Fixed assets - original cost (i.e. undeflated, undepreciated) 186.61 219.92 251.99 314.45 305.84 353.10 421.45 568.40 665.92 690.99 830.43 962.48 Fixed assets - not value (undeflated, but net of depreciation) 119.12 145.21 170.02 226.00 212.90 248.34 300.41 408.76 479.32 490.71 585.39 673.84 Year-end total of outstanding loans 49.09 62.29 110.55 169.45 219.69 247.50 Total working capital 331.26 427.04 506.46 726.94 957.06 1175.45 Average amount of quota working capital 97.46 120.05 140.65 163.54 164.96 181.95 218.47 284.07 343.76 427.18 of which: xxx funds 84.54 85.47 89.52 84.24 132.76 167.00 210.66 193.21 of which: funds for stocks of final goods 18.89 33.20 40.74 48.92 58.74 71.02 88.92 175.44 Year-end outstanding loans for working funds 84.68 102.61 133.19 198.75 255.04 315.87 406.13 Enterprise year-end working funds (state grants plus own funds) 49.51 52.29 54.00 58.20 52.23 53.62 59.32 61.01 93.95 Turnover period for working capital (days) 57.13 63.07 80.55 92.93 95.47 89.84 95.81 97.67 96.34 Total cost for all products 458.62 516.61 494.07 622.71 524.38 684.51 884.98 1102.01 1305.25 Depreciation allowance 7.13 6.04 9.31 12.1f 12.20 14.95 18.74 26.42 32.74 36.66 43.32 51.30 Major repair allowance 4.44 5.18 5.87 7.46 6.95 10.15 14.02 17.31 19.30 23.09 25.80 Profit retained by enterprises 12.36 9.90 10.12 11.28 16.39 21.79 31.65 37.27 33.04 20.35 12.32 Total wage bill 28.32 31.55 34.46 33.09 39.15 46.89 59.37 80.40 108.05 120.18 136.40 147.88 Averagenumberof staff andworkers(10,000persons) 360.75 415.11 451.65 427.53 430.52 448.12 480.48 573.84 599.78 619.63 631.07 643.22 Ratio: (profit+tax)/sales (%) 24.30 24.32 20.91 18.76 16.94 17.94 15.80 14.11 13.81 11.22 Ratio: (profit + tax)1aross output(%) 24.60 24.41 19.77 16.53 14.03 15.39 14.61 13.97 15.99 12.81 Ratio: (profit+tax)/(original fixed assets +working capital)(%) 51.68 48.47 33.36 24.87 22.38 22.83 20.27 17.39 17.57 14.08 Ratio: (profit+tax)1(net fixed assets + working capital) (%) 67.49 61.87 41.96 30.51 27.89 29.63 25.00 21.34 21.55 17.16 Profit + tax per worker (yuan) 4354 4245 3052 2628 2356 2843 2700 2577 2958 2542 Retained earnings per worker (yuan) 311 227 224 352 366 454 552 621 533 Wage payments per worker (yuan) 790 776 761 758 902 1046 1173 1401 1801 1940 Output per man-year (figures based on output value at constant prices) (yuan) 16546 16467 16530 15895 16790 18487 18485 18092 17056 19852 Annual percentage rate of cost decrease for comparable products (%) 0.93 0.26 0.86 -0.21 -0.76 -3.57 -3.57 -8.04 -17.02 -29.16 Ratio: (profit+tax)ftotal cost (%) 20.81 16.13 14.09 11.49 11.78 9.26 12.31 12.12 9.81 Notes: This table excludes rural industry. It covers the urban textile sector (yam, cloth, chemical fiber, tetile mechineryl but excludes garments, shoes, end hats. Except as noted., al variables sto presentedin units of 100 million yun at current prices Source: Textie Datebook, 1989, 1990, 1992, pg. 148 24 Institutional Change and Industrial Innovation in Transitional Economies Table 2 Productivity Performance of China's Textile Industries During the 1980s average annual average annual rate of output rate of productivity growth growth Li Jingwen et al. (1992) 1981-87 textile mill products 11.32% 0.96% apparel and other textile products 12.82% 1.91% total economy value added 1979-1990 8.35 2.53 Zheng Yuxin (1992) 1980-90 textile (excluding cotton textile) 12.80 0.46 cotton textile 6.88 0.22 sewing 12.17 1.56 all manufacturing 11.11 1.93 Institutional Change and Industrial Innovations in Transitional Economies 25 Table 3 Average Wages for Different Classes of Enterprise in China's Textile Industry, 1989-91 (Yuan per man-year) 1989 1990 1991 1. Joint venture 3663 4232 5674 2. State sector 2069 2252 2377 3. Urban collectives 1368 1688 1862 4. Township-village 1132* n.a. n.a. *average wage figure for all industries Sources: Line 1: Calculated from employment and wage bill for a small sample of firms covered in Tetile Data Book for 1989, 1990, 1991, p. 24. The figures for 1990 and 1991 are for Sino-foreign joint ventures only. The 1989 figure includes some information from foreign-owned firms. The source provides no data for firms funded by overseas Chinese from Hong Kong and elsewhere. Line 2. Calculated from data on employment and wage bill from Textile Data Book for 1989, 1990, 1991, p. 12. Line 3. Line 2. Calculated from data on employment and wage bill from Textile Data Book for 1989, 1990, 1991, p. 18. Line 4. Calculated from data on employment and wage bill from Rural Industry 1990, pp. 135, 149.