Economic Analysis of the Causes of Corruption in Chinese State-Owned Enterprises and Countermeasures Research

An Economic Analysis of Causes of Corruption in Chinese State-Owned Enterprises and Countermeasures Research
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August 29, 2023
Table of Contents   1.       Introduction. 4 1.1.    Problem.. 5 1.2.    Research question. 6 1.3.    Objective(s) 7 1.4.    Dissertation Structure. 8 2.       Literature Review.. 9 2.1.    Theories on Corruption and SOEs. 9 2.1.1.   Definition of corruption. 9 2.1.2.   Definition of State-Owned Enterprises. 12 2.2.    Causes of Corruption in SOEs. 14 2.2.1.   Objective Basis for Emergence of Corruption. 15 2.2.2.   Subjective Factors in the Emergence of Corruption. 15 2.3.    Economic Analysis of Corruption in SOEs. 16 2.4.    Corruption in the Chinese Culture and Socio-Political Context 17 2.4.1.   Historical Underpinnings of Corruption in China's Political Economy. 17 2.4.2.   Peculiarities of Corruption within China Compared to Other Countries. 17 2.4.3.   The Unique Challenges Posed by SOEs in the Chinese Context 18 2.5.    The International Political Economy Perspective. 19 2.5.1.   Global Implications of Corruption in Chinese SOEs. 19 2.5.2.   Effects of Corruption in China’s SOEs to its Relations with Other Countries, International Trade, and Global Economic Trends. 20 2.5.3.   Comparisons of Corruption in SOEs of Other Countries and Its Impact on International Political and Economic Relations. 20 2.6.    Governance Measures and Countermeasures Against Corruption. 21 2.6.1.   Existing Mechanisms within China to Combat Corruption in SOEs. 21 2.6.2.   International Best Practices and Lessons for China. 22 2.6.3.   Analysis of How These Measures Affect the Broader Political Economy both Domestically and Internationally. 23 2.7.    Macro-level Implications of Corruption in Chinese SOEs. 24 2.7.1.   Impact on the Chinese state, Political Legitimacy, and Governance. 24 2.7.2.   Effect on China's economic development, growth trajectory, and economic strategies  25 2.7.3.   Consequences for international investors, global markets, and foreign policy dynamics  26 3.       Methodology. 27 3.1.    Methodological Rationale. 28 3.2.    Data Collection Process. 29 3.2.1.   Literature Sourcing. 29 3.2.2.   Inclusion and Exclusion Criteria. 30 3.3.    Analytical Strategy. 32 3.3.1.   Data Extraction and Coding. 32 3.3.2.   Thematic Analysis. 32 3.3.3.   Comparative Analysis. 32 3.4.    Consideration of Context 32 3.5.    Ethical and Bias Considerations. 33 3.6.    Limitations and Addressing Themes. 33 4.       Key Findings. 34 4.1.    Subjective Factors Influencing Corruption. 34 4.1.1.   Cultural Attitudes. 35 4.1.2.   Individual Morality. 36 4.1.3.   Political Interference. 37 4.2.    Objective Bases of Corruption in SOEs. 38 4.3.    Economic Costs of Countermeasures Within SOEs. 41 5.       Conclusion. 44 6.       References. 46 1 Introduction
All political economies, in both developing and developed nations, large or small countries, in market economies, in transitioning marketing economies or jurisdictions under authoritarian regimes. In other words, no political economy is immune to corruption so far in human history. In China, the contemporary political economy is characterized by an emboldened state's role as a regulator and owner of businesses, expecting to serve the interests of party-state objectives (Pearson, Rithmire, & Tsai, 2023). Since the 1949 liberation, the Chinese political economy has primarily been dominated by state monopolies, unlike in capitalist states where private entities enjoy a free market.
Despite periods of anti-monopoly campaigns, state-owned enterprises (SOEs) dominate vital sectors, especially in financial services and resource extraction (Huang, 2019). The SOEs' dominance of the Chinese economy has opened up new forms of corruption. According to Bakken and Wang (2021), SOEs have helped transform corruption in China from "petty theft and speed money to grand theft and access money." As avenues for grand theft and access to money, SOEs are increasingly affected by corruption. Although it must be noted that the levels of 'actual corruption' that exist within the state may be hard, if not impossible, to measure, Zhu (2021) noted that, based on Transparency International's ranks, China has suffered severe corruption issues, with a significant portion reported within SOEs like the Sinopec, whose corruption cases provide a case study. These observations necessitate scholarly attention focusing on the causes of corruption in these SOEs and potential countermeasures through case.
1 Problem
Corruption is a complex and sensitive social and political phenomenon in all countries. As a vice, corruption squanders government revenues, discourages private enterprises, undermines the legitimacy of a government, and hinders economic growth (Siddiquee & Zafarullah, 2020). Because of its magnitude, corruption can be perceived as a deep-rooted, contagious, and difficult-to-eradicate wicked problem involving different knowledge sources, multiple stakeholders, and complex outputs or impacts. The phenomenon is a hot topic in academia because of corruption's prevalence and profound implications. According to Jancsics (2014, p. 359), most corruption studies fall within three broad categories: rational actor models, structural models, and relational models. It is through this model that corruption has been studied through different disciplinary lenses like culture, criminology, sociology, political science, and economics.
In terms of cultural studies, for instance, researchers have relied on Hofstede's macro-cultural dimensions to establish cultural causes of corruption (Fürstenberg, Starystach, & Uhl, 2018). Outcomes suggest that country-specific cultural patterns significantly impact the propensity to act corrupt. Similarly, sociologists (Uberti, 2016) and criminologists (Brooks, 2016) have outlined discipline-specific factors influencing corruption. Jancsics (2014) argued that the rise of multidisciplinary approaches to corruption necessitated the need to reduce reliance on the narrow models established by economists. Structural models of corruption emphasize external factors that influence corruption, while relational models focus on networks and interactions among corrupt actors. Both models are inspired by sociology, criminology, political science, and cultural studies. Economists, however, often focus on the rational-actor model, where corruption results in a cost/benefit analysis of risks and outcomes.
While a multidisciplinary approach to corruption is informative, there is always a risk of generalizations. Discipline approach, like from an economist’s view, for instance, according to Jancsics (2014), may provide narrow yet more specific details about a phenomenon. In analyzing the prevalence of corruption within Chinese SOEs, the rational actor approach provides valuable insights. From this perspective, individuals within an organization, such as SOEs, make decisions based on a calculated evaluation of costs and benefits (Van Aaken & Kurtz, 2019). Given the immense importance of SOEs in the Chinese economy, officials within these enterprises are uniquely positioned. They enjoy extensive privileges, face minimal external oversight, and navigate market rules that often lack transparency. This environment places them in a situation where the potential economic benefits of engaging in corruption—access to resources, proprietary information, and financial gains—often outweigh the perceived risks. From the standpoint of a rational actor, these conditions can create compelling incentives to indulge in corrupt practices, mainly when the probability of detection and punitive consequences seems low compared to the potential rewards. Therefore, this paper attempts to provide a more detailed analysis of the causes of corruption in SOEs from the economics perspective, underlined by reasonable assumptions, to derive scientific conclusions.
2 Research question
Contemporary studies on corruption often cover causes, effects, and potential anti-corruption actionable plans. The topic of effects is vital because it attempts to weigh or quantify corruption's impact on the economy and society. However, as D’Amaco (2015) argued, quantifying corruption's effects may hasten response, but it does not necessarily help formulate countermeasures. Based on this view, the current research needs to cover effects and narrow it down to causes and countermeasures. Hence, the question guiding the research is: What are the causes of corruption and the cost of countermeasures in China's SOEs from an economic point of view?
3 Objective(s)
An economic analysis of corruption seeks to investigate and analyze the causes of corruption. Based on the rational actor model of corruption, an economic view focuses on a cost-benefit analysis of corrupt activities involving economic incentives. The model suggests that before a person engages in corrupt activity, their decision is influenced by a rational comparison of the risks and benefits involved (Bohn, 2014). In retrospect, understanding the causes of corruption from an economic perspective helps inform countermeasures. Therefore, the first objective is to analyze the causes of corruption in China's SOEs from subjective factors, objective basis, and the economy.
Some scholar attributes the growth of China's economy to the reforms and opening-up policies carried out since 1979 (Zhu, 2021). These reforms and policies sought to increase the economy's efficiency by introducing competitive practices, which would, in effect, reduce state monopolies (Huang, 2019). However, what is strange is that the growth of China’s economy has also been marked by increased corruption. This deviates from the pattern of other nation-states wherein increased corruption also leads to poorer economic conditions. As mentioned by Ang (2020), "While corrupt countries are usually poor, China appears to be an exception."
Bakken and Wang (2021) also wrote of a paradox marked by remarkable economic growth amidst "the well-documented issue of corruption." Therefore, after understanding the causes of corruption, providing an economic perspective on countermeasures is also essential. As the government strives to end corruption, it becomes crucial to understand the economic costs of countermeasures directed at the causes. Therefore, the second objective is to estimate the economic costs of countermeasures within the SOEs.
4 Dissertation Structure
The current paper is divided into a total of six chapters. Chapter 1 started by emphasizing the presence of corruption in all political economies. This comes from the observations that while China’s economy has grown, cases and the magnitude of corruption issues have also increased. The section emphasized adopting an economic perspective based on a rational model where a person undertakes a cost-benefit analysis before engaging in corruption. Section 1 also states the problem of a need to understand the economic causative factors of corruption with SOEs and the cost of potential countermeasures. Research objectives are also covered in this section.
Covered in Chapter 2 is the literature review. It explains the theory of corruption (the principle-agent theory), which informs the theoretical rooting of the current research. A precise definition of corruption is provided at the beginning to give discussions a stronger relevance. The definition of SOEs is also provided to guide discussions alongside their relevance in China's political economy. Based on these definitions, the chapter closes with a more in-depth discussion of current literature focusing on causes and forms of corruption and potential countermeasures within China’s SOEs.
Chapter 3 focuses on the methodologies used in the current research. The section covers justifications for relying on grounded theory as the theoretical framework and the choice of a single case study (Sinopec) from which findings will be established. The findings are covered in Chapter 4, including a brief overview of Sinopec, the SOE used as the case study.
Chapter 5 discusses findings from Chapter 4 about the literature review section. Key areas covered include causes of corruption in China’s SOEs, cost of countermeasures, recommendations on applicable anti-corruption responses that are effective but least costly from an economic point of view, and the study’s limitations. Chapter 6 summarizes all findings and provides recommendations for future researchers on the topic.
2 Literature Review
5 Theories on Corruption and SOEs
1 Definition of corruption
Corruption is widely known and used in academia and public discourse. Depending on the context, the term has both broad and narrow definitions. In the broadest sense, corruption refers to any act that contradicts the traditional norms of a society, the society’s legal framework, and the perceived moral standards (Luna-Pla & Nicolás-Carlock, 2020). For example, in a collectivist society, pursuing private gain, pleasure, and convenience at the expense of others is considered a corrupt act.
In a narrower sense, corruption can be defined as the use of public power to advance personal or in-group interests at the expense of the larger public (Liu, 2016). Where SEOs are involved, civil servants advance the government's profitability directly while competing against private entities in similar services or products. Civil servants like employees, managers, and executives in SEOs have access to power, information, and money (Leutert & Vortherms, 2021). The goal of civil servants is to advance the state’s business. However, they are considered corrupt when they use these privileges for personal gains or to advance a group’s interest. Unlike in private spaces where one can be corrupt without uproar, corruption in public spaces implies loss of public taxes and potential repercussions to the economy and the taxpayer.
Luna-Pla & Nicolás-Carlock (2020) define corruption as a larger phenomenon that goes beyond private boundaries. This definition can still be used to frame corruption in public spaces since corrupt individuals violate the legal framework and the desired standards of morals, professionalism, and patriotism. However, policing and even quantifying corruption based on this broad definition may lead to gross generalization of the issue (Leutert & Vortherms, 2021). A more specific definition can be used to frame the phenomenon and its causative factors for the practical identification of countermeasures. In this case, the definition by Liu (2016) provides a basis for viewing the corrupt person and the corrupt act from a public point of view and the economic factors that influence the person to take part in the act. Therefore, this definition provides a basis for applying the rational-actor model.
There are two aspects to Liu's (2016) definition of corruption. The aspect is that acts of corruption are conducted for personal gain. In this case, a person is working to gain an unfair advantage by using their authority or privileges in SOEs. This means that when the person performs a cost-benefit analysis, they focus on what they risk or stand to gain personally. The second aspect is that corrupt individuals pursue or act as directed by in-groups like political parties. In China, a direct relationship exists between the political party that wields power and those working in SEO (Zhang et al., 2023). This means there is a tendency for an individual to engage in corruption for the benefit of a political party within or without government. Thus, when the person performs a cost-benefit analysis, they prioritize in-group interests over personal gains. Acting in favor of the political party in power may be politically correct because someone can enjoy the state's protection. Still, it does not mean it is not corruption.
Additionally, as Luna-Pla & Nicolás-Carlock (2020) and Liu (2016) suggest, rent-seeking is also a form of corruption, though it seems hidden in a cloak of legality. Rent-seeking refers to manipulating economic conditions or public policy to increase profits (Li, Wu, & Jiang, 2017, p. 240). Like private players, SOEs must also seek ways to increase their profits and enhance efficiency. However, there are conditions in which corruption could, through rent-seeking, be beneficial. However, Luna-Pla & Nicolás-Carlock (2020) insist it is still corruption because it violates existing laws or policies to provide SOEs a competitive advantage over private players in the same sector. Under some conditions, for example, corruption can increase competition.
Additionally, a government may be under pressure to provide employment opportunities and, therefore, choose different levels of enforcement that favor SOEs at the expense of the private sector (Cai & Li, 2006). However, rent-seeking also occurs between private players and SOEs. In this case, as defined by Liu (2016), rent-seekers and actors of corruption are both people who wield public power. The only difference is that the latter wield power from government offices while the former have money and connections.
By emphasizing the use of public power for private gain, the definition by Liu (2016) brings the economic point of view into context. In contrast, Luna-Pla and Nicolás-Carlock (2020) define corruption in both private and public spaces. However, since corruption within public spaces does not violate economic regulations, this definition loses weight. In this case, based on Liu (2016), corruption refers to an economic act in which a person with economic power or privileges uses public power for their benefit or to benefit an in-group in violation of rules and regulations. The power they yield allows them to be shielded, get away unpunished, and thoroughly enjoy the gains made (Zhang et al., 2023). Therefore, this definition provides an ideal basis for discussing corruption from an economic point of view.
Economics is the science of production, distribution, consumption, and transfer of scarce resources (Modig, 2020, p. 2207). As a science, decisions are made rationally through a cost-benefit analysis of risks and benefits. From an economic point of view, corruption is the use of political power to change or manipulate the forces of production, consumption, and transfer of wealth for personal gains or to favor a particular group. By combining the definitions by Modig (2020) and Liu (2016), there are two fundamental assumptions to consider: 1) corrupt actors are economic people who make their decisions rationally (e.g., through a cost-benefit analysis), and 2) resources are scarce. In other words, corrupt decisions are made with the scarcity of resources being among the influential forces.
2 Definition of State-Owned Enterprises
In capitalist nations, the notion of a free market for private business and competition reduces the role of government in regulations. It ensures a good environment in which private businesses can thrive and where there is protection of private property. In contrast, China's political economy is one in which state-managed monopolies are an intrinsic part of society (Thynne, 2021). The definition of SOEs may vary depending on context and situation. According to the International Monetary Fund (IMF), state-owned enterprises (SOEs) refer to businesses that are controlled by the government (Böwer, 2017). But because this definition is institutional-
based and comes from a Western sphere point of view where SOEs are fewer compared to China, a narrower definition is required. As warned by Szarzec, Dombi, and Matuszak (2021), the definition and framing of economic terms may be influenced by factors like culture, interests at stake, language, and types of contracts or agreements.
For example, some SOE definitions have been informed by the influence of International Investment Agreements. According to McLaughlin (McLaughlin, 2020, p. 596), the definition of the term may differ based on the language used in the agreements. Consequently, a state-owned enterprise is a large organization created by the government to undertake commercial activities. These organizations are either part of the government (parastatals) or are stock companies in which the government holds the majority control. McLaughin’s definition is narrower because it highlights the role of the government as either the owner or majority shareholder of a business.
The definition by Bower (2017) reduces the state’s role into control. However, in any political economy, the state has some level of control through laws and regulations established in the constitution.
McLaughin defines SOEs as a form of production (business organization) with the traits of non-profit and for-profit legal entities (Shi et al., 2018). The for-profit aspect implies that even though SEOs are run by the government to which people pay taxes, they pursue preserving and increasing the value of assets. In other words, even the government is looking to profit from the market or industry regardless of whether it is competing with private companies. On the other hand, SOEs can be perceived as non-profit, especially where they are established to provide a public service to which citizens are entitled because they pay taxes (Bakken & Wang, 2021). These include telephone services, electricity supply, transportation, mining, postal services, water and sewage services, and banking. Therefore, while China's SOEs seek to provide public goods and services, they also seek to profit from it just the same as private entities providing similar services or products.
SOEs also have a particular administrative character that may influence their definition. For example, definitions in China may be complex because of the underlying historical reasons. In international practice, like the IMF, an enterprise is considered an SOE if the state has more than 50% of the assets. However, SOEs in Taiwan and Mainland China rely purely on the state's assets. This means that, unlike private businesses, SOE may receive protection from the government based on the relevance of services or goods provided (non-profit aspect) and the state of problems within (for-profit aspect) (Cai & Li, 2006). Therefore, SOEs are defined based on McLaughin, emphasizing that SEO relies entirely on government assets. In other words, the definition involving the government holding part of the stock (whether majority or not) does not merit.
6 Causes of Corruption in SOEs
The interplay between politics and the economy within Chinese SOEs offers a rich study terrain for international scholars. Zhang et al. (2019) argue that while these enterprises are the linchpins of China's astounding economic trajectory, they also provide intriguing insights into the challenges of graft. In this context, it is imperative to segregate the causes into objective structural reasons and the more nuanced subjective factors.
3 Objective Basis for Emergence of Corruption
The structural architecture of Chinese SOEs, replete with vast operations and intricate hierarchies, presents an intricate puzzle. Zhang et al. (2019) contend that these enterprises' size and operational depth can inadvertently open up channels susceptible to corrupt activities. They stress that these potential loopholes become more pronounced when compounded with the opacity often surrounding SOEs' transactions.
In a comprehensive study, Li et al. (2023) detail how the convolution of financial processes in large-scale entities can metamorphose into corruption hotbeds, mainly when checks and balances systems have not evolved to pace with their rapid expansions. This point is furthered by He et al. (2020), who elucidates on the inherent ambiguities that mar the demarcation between state mandates and commercial objectives within SOEs. The consequent gray zones, they argue, can be exploited by those looking to leverage systemic ambiguities for personal benefit.
4 Subjective Factors in the Emergence of Corruption
Shifting from the systemic to the individualistic, the subjective realm offers a complex weave of motivations, organizational culture, and personal temptations. Wu and Christensen (2020) bring forth the rational actor model as an illuminating framework. They theorize that officials, no matter their hierarchical standing, can be swayed by corrupt temptations if the economic rewards significantly outweigh the perceived risks and moral reservations.
This propensity towards graft is exacerbated if the organizational culture either tacitly condones or remains apathetic to such tendencies. In line with this, Zhao et al. (2020) emphasized the cascading effects of a compromised moral compass within an enterprise. When unethical inclinations become institutionalized or a sense of endemic corruption permeates the ranks, it can lead to a dangerous normalization of graft.
Delving deeper, the nuanced role of 'guanxi' or intricate personal networks in Chinese business practices must also be acknowledged. As explored by Cheang and Palmer (2023), these relationships, while pivotal for business, can sometimes overshadow meritocracy, giving rise to nepotism and preferential treatment that can further embed corrupt practices.
7 Economic Analysis of Corruption in SOEs
Economics has gained significant traction among academicians as a lens to understand corruption within SOEs. Ang (2020) asserts that to truly grasp the depth of corruption, one must explore its economic underpinnings. They posit that the monopolistic nature of several SOEs stifles competition, leading to inefficiencies and a sense of invulnerability. The said literature expands on this by illustrating how these uncompetitive landscapes can become incubators for graft.
Highlighting the fiscal aspects, Li & Zhou (2020) present a compelling case about the allure of SOEs, with their vast resource pools, for entities aiming to divert funds. The confluence of enormous resources and occasionally flimsy oversight can result in sizable economic leakages.
Thus, comprehensively addressing corruption within SOEs demands an approach that is holistic – one that intertwines structural remedies, cultural shifts, economic strategies, and stringent accountability measures. The international ramifications of these findings underscore their importance, not just within China but in global political and economic discourses.
8 Corruption in the Chinese Culture and Socio-Political Context
5 Historical Underpinnings of Corruption in China's Political Economy
China's intricate political economy, deeply interwoven with its historical progression, paints a comprehensive backdrop against which to assess the underpinnings of corruption. The Maoist era, characterized by its staunch centralized economic model, insulated SOEs from market fluctuations, thereby appearing to diminish graft opportunities (Manion, 2016). While this era's centralized approach seemed robust on the surface, the subsequent era unveiled vulnerabilities.
Deng Xiaoping's reforms ushered in an era of transformation. Ang (2016) delves into the implications of this shift, emphasizing that the metamorphosis from command to market-oriented paradigms disrupted traditional power structures. These structural upheavals led to ambiguities in property rights, effectively introducing spaces where corruption could burgeon. Pei (2016), further expanding on this narrative, contended that these transformative reforms, although pivotal for economic expansion, simultaneously cultivated conditions for entrenched, institutionalized corruption. ...