The Impact of Competition and Labor Remuneration on Profitability in China's Industrial State-owned Enterprises

China's industrial state-owned enterprises (SOEs) have seen a secular decline in profitability throughout the reform period. Barry Naughton argues that this decline was in large part due to a decline in monopoly rents as competition with enterprises in other ownership forms increased. Fan Gang and Woo Wing-Thye, on the other hand, contend that profitability declined across all sectors independent of the degree of competition, and that excessive labor remuneration accounts for the broad decline in SOE profitability. Testing the two hypotheses with aggregate sectoral and provincial data from the mid-1980s to the late-1990s, neither appears convincing. Yet at closer inspection these are not competing hypotheses. The two causes affect overall profitability through different channels. Competition and labor remuneration have a highly significant impact on intermediate profitability measures that take the two channels into account separately. Together they explain most of the variation in overall profitability.