The evolution of firms and their resource allocation for innovation: the impacts of institutional change

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The evolution of firms and their resource
allocation for innovation the impacts
ofinstitutional change
Kaidong Feng School of Government, Peking
University Qunhong Shen School of Public Policy
Management, Tsinghua University
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A brief of this research

• Group-specific characters of firms

Institutional changes
Authority
Resource allocation
Innovative capability
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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
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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
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Backgrounds
Institutional reform at firm level
Strategy-making
Integration
Org Learning

• 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.

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Case studies

• Four categories of firms
• 1 Sino-foreign joint ventures
• 2 SOEs type-1 manufacturing-based
• 3 SOEs type-2 ST-based
• 4 New indigenous firms

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Group-Specific characteristics of performance

• Chinese power equipment industry in the 1990s
• (two sectors grid protection generator control)

Category Previous entity Case studied Scale (90s) Role (90s) Role (now) Governmental support (90s) Indigenous innovation
JVs Backbone factories XiYi (-Yokogawa) Large Major Minor Strong, core No
SOE-m Backbone factories NanZi Large Major Mid Strong Marginal products techs
SOE-t ST institutes NanRi S?L Minor Major Strong Yes, important products techs
New none XinHua S?L Minor Major Little, even negative Yes, important products techs
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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 RD 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)
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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 RD 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 RD 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
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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 RD 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 RD force
Leadership Disorder 30 subs by previous
in-house RD 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
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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 RD 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
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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 RD centre ? NaRi
Policy support To enforce the reform of ST
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 ST 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)
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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 RD 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.
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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)

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Summary of case studies
1-XiYi 2-NanZi 3-NaRi 4-Xinhua
Public assets Yes Yes Yes No
Gov support Yes Yes Partly yes No
Finance from SOB Yes Yes Based on projects No, and then based on business orders
Stock market No Listed in SSE (1999) Listed in SSE (2003) No
TMFT Yes Yes No No
Corporate reform in gov schedule Yes Yes Yes (reform of ST institute) No
Centralization of authority Yes yes Yes, but based on labs Shared
Integration of strategy-making and learning No No Yes, but only at lab level Yes, integrated
Investment for Innov No No Yes, but by labs Yes
Integration of strategy-making organizational learning No No Only at lab/sub level for the limited Org scale yes
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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
• RD was carried out by the public ST division
• Impact of the Trading Market for Technology
  policy
• Dominance of technological advance was given to
  foreign partners, no indigenous activities for
  innovation

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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

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Financial Inducement
Majority manufacturing-based cost competition
Indigenous firms
Gorge very few exceptions
Minority technology-based innovative competition
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Conclusion

• Innovative firms havent 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.

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• Thanks for your attention!
• Feng Kaidong, k.feng_at_pku.edu.cn