Guanxi and evolving ownership structures in Chinese private enterprises

This paper develops a theoretical model to study features of the evolving ownership structures of private enterprises in Zhejiang Province, China. The model predicts that in a developing economy where the market environment is immature or unstable, the ownership structure of a typical private enterprise involves a cooperative arrangement between a party with management skills and another party with Guanxi (connections). As the market environment becomes more stable, the ownership share of the party with management skills increases. This result is confirmed by empirical evidence of 296 surveyed firms in Ningbo city of China, showing that the perceived importance of both government and family Guanxi declined with perceived improvements in market stability.