SOE Reform As Signaling And Credible Commitment

The regional competition stimulated by the fiscal decentralization in China is considered to be the key of China's economic miracle. This competition provides incentives to local government to develop their jurisdiction by further institution reform and so on. This point of view offers us an important perspective to understand the growth of China's economy, but further researches concerning this idea are still needed. This paper tries to add to this line of literature by study the relationship between the regional competition for FDI and the SOE reform motivated by local governments.This paper proposes two hypotheses related to how FDI can promote SOE reform: signaling and credible commitment. When the information is asymmetric, SOE reform can play a role as a signal for the type of the local government: open or conservative. In order to send signals to attract FDI, the local governments have motivation to enforce more SOE reforms. Meanwhile, the SOE reform decreases the incentive of the local government to interfere the market, which would make credible the commitment to maintain fair competition and hence attract more FDI. In regard of this, the local government would accelerate the SOE reform actively. We tested those two hypotheses and they turned out to be quite consistent with the case of the eastern China during the period from 1991 to 1996. In addition, another three hypotheses that have been discussed in the literature related to the effects of FDI on the SOE reform are tested as well.Meanwhile, we analyzed the difference of SOE reform between east and west China. We find that the difference of competition intensity (including the competition for FDI) between east and west China explained a significant part of the difference of SOE reform between these two areas.