Political Compromises: The Privatization of Small- and Medium-Sized Public Enterprises in China

One important feature of China’s privatization process is that insider privatization prevailed, and that outsiders could hardly gain access to buying state enterprises. Why was a majority of small- and medium-sized public enterprises sold to the firms’ former managers (and workers)? How did the tightened regulatory environment affect local privatization in China? Building on insights into institutional change, I argue that the choice of a specific privatization strategy results from political compromises among local officials, workers, and managers of public enterprises under specific regulatory constraints. Local officials’ incentives for privatization and their reactions to the changing regulatory environment had a great impact on the dynamics of local privatization.