The Emergence of Market Practices in China's Economic Transition: Price Setting Practices in Shanghai's Industrial Firms

Abstract

This study focuses on the ability for medium- and large-scale economic actors to set prices independent of state control in reform era China. Analysis of a random sample of firms in industrial Shanghai shows two significant findings. First, in support of theories of path dependence, a firm's position in the administrative hierarchy of the former command economy has a significant impact on the freedom the firm has to set prices; firms closer to the central government are significantly more likely to set pr-ices independent of state control. This finding offers a counter perspective to studies that have argued, based on a lack of gains in productivity, that reforms are not being enacted in the upper levels of China's industrial hierarchy. Second, firms are influenced by formal relationships with foreign joint venture partners, as those with joint venture partnerships are significantly more likely to set prices independent of state control. This finding offers empirical support for the idea that foreign investment has an on-the-ground impact on the decisions and practices of firms in China's transitional economy.