The Corporate Form and State Ownership in China

Despite China’s efforts to corporatize state-owned enterprises (SOEs), these entities have not fully adopted the pure corporate form typical of private corporations. This chapter employs the theoretical framework of regulatory costs and ownership costs to explain the distinctive characteristics of SOEs by examining how they differ from the corporate form characterized by five features: legal personality, limited liability, delegated management, transferable shares, and investor ownership. While the corporate form is essential for financial purposes – particularly when a firm needs to obtain equity financing from a large group of investors – the benefits for governance purposes are less clear. Although adopting a corporate form reduces ownership costs, it incurs relatively higher regulatory costs. The chapter concludes by considering how different organizational forms can be utilized to achieve both financial and regulatory objectives in various contexts.