China now has the second-largest number of Fortune Global 500 companies in the world. Most of the Chinese companies on the list are state-owned enterprises (sometimes called “SOEs”) organized into massive corporate groups with a central government agency as their ultimate controlling shareholder. Despite these groups’ importance to China’s domestic economy and foreign investment strategy, many features of the SOE sector—particularly the organizational structure and governance characteristics of the SOE groups—remain a black box.

Unpacking the black box requires moving away from the standard focus on agency costs in listed firms that predominates in the corporate governance literature. Instead, in the paper, We are the (National) Champions:  Understanding the Mechanisms of State Capitalism in China, my co-author Li-Wen Lin and I examine the relational ecology in which these groups exist, with a focus on institutionalized mechanisms linking the business groups with other organs of the party-state. We argue that through these linkages, Chinese managerial elites in the economy have assembled what Mancur Olson called an “encompassing organization”—a coalition whose members “own so much of the society that they have an important incentive to be actively concerned about how productive it is.”

Exposing the mechanisms of Chinese state capitalism in this way raises many questions for scholars and policymakers, the salience of which increases as the global interaction of Chinese firms expands. For example, is the rise of Chinese state-owned enterprises adequately explained by prevailing theories in the comparative corporate governance literature? How might the increased operation of Chinese SOEs in foreign markets change the institutional trajectory of corporate capitalism in China? Do the institutions of market and investment regulation in the United States adequately contemplate hybrid business-political actors like Chinese state-owned enterprises? By examining the organizational structure of SOEs, this Article provides a foundation for future research on a pivotal aspect of China’s contemporary political economy.

The rise of state owned enterprises, particularly from China, as active global investors and participants in international markets has become a major topic of discussion among  policy makers in the United States and the EU. Over the past year, I have testified before the U.S.-China Economic and Security Review Commission, and consulted with a range of government officials involved in international trade, investment and national security, on the policy implications of Chinese SOEs. The key concerns aired in those sessions were that Chinese SOEs may receive subsidies from the state that distort their competitive position vis-à-vis private firms (both non-Chinese and Chinese), or may pursue non-commercial objectives that threaten national security interests. Although  international trade agreements have special “disciplines” for SOEs, and while a process for screening foreign investment on national security grounds is in place in the U.S. and many other countries (though not at the EU level), the rise of Chinese SOEs has prompted a re-examination of the robustness of these regimes.

It is natural that a new type of player in global markets sparks anxiety among status quo participants–think of the reaction in Congress to the rise of Japanese keiretsu firms in the 1980s.  No doubt some of the current concerns of policy makers can be written off as xenophobia or simple fear of the unknown.  But as I hope our article demonstrates, Chinese SOEs do have some features that find no parallel in other globally active firms.  Whether they merit special scrutiny on account of these features remains to be seen.  More certain is the fact that Chinese SOEs will continue to expand internationally, along with the controversy surrounding their investments and activities.

The full article, which was recently published in the Stanford Law Review, is available here.