The Journal of Socio-Economics 39 (2010) 619–630 Contents lists available at ScienceDirect The Journal of Socio-Economics journal homepage: www.elsevier.com/locate/soceco Modes of state intervention and business group performance in China’s transitional economy Xinxiang Chen National Strategic Planning & Analysis Research Center, Mississippi State University, nSPARC, PO Box 6027, Mississippi State, MS 39762, United States article info Article history: Received 17 June 2009 Received in revised form 21 April 2010 Accepted 21 June 2010 JEL classification: O16 P26 P31 Keywords: State Intervention Business Group Performance Transitional Economy abstract This paper examines the contingent nature of state intervention affecting business group performance in the context of a transition economy by identifying different modes of state intervention in China’s transi- tional economy. Using data on China’s 76 business groups collected in 2006, I find that, at the group level, modes of state intervention have different economic effects on business group performance, depending on the specific modes of intervention and the context of the institutional environment in China’s transi- tional economy. Through direct intervention – such as ownership, officials, and Chinese Communist Party members at the group level – the Chinese state failed to provide positive economic effects. However, the result demonstrates the state’s ability to provide positive economic effects by matching the functional demands of the emerging market, such as loans from state-controlled banks as financial support. © 2010 Elsevier Inc. All rights reserved. 1. Introduction The issue of effects of state intervention on transformative economic growth has long been debated and remains unsettled. China’s economic miracle has especially ignited a broad theoretical reflection on the role of government in promoting transformative economic growth (Nee, 2000; Nee et al., 2007; Oi, 1992, 1995; Walder, 1995; Peng, 2001; Che and Qian, 1998). I view both the central government and provincial and municipal governments as comprising the Chinese state. The very possibility that different modes of state intervention in a specific institutional context may result in different economic consequences, however, makes the relations of state intervention and its effects on economic perfor- mance complex. Valuable insights come from studies demonstrating the effects of state intervention in varying modes on the formation and the development of business groups and firms as well in differ- ent institutional contexts (Amsden, 1989; Fields, 1995; Fligstein, 1990; Gerlach, 1992; Jones and Sakong, 1980; Keister, 1998, 2000; Miyashita and Russell, 1994; Nee, 2000; Nee et al., 2007; Robison, 1986; Walder, 1995; White, 1974). The central arguments about the role of the state in economic development are divided into two schools: one is by neo-classical economists from the perspec- tive of the liberal political economy, and the other is by political E-mail address: xchen@nsparc.msstate.edu. sociologists and economic sociologists from the perspective of the developmental state. The former takes for granted that the critical function of the state is to provide a favorable external economic environment, but resists any direct intervention by the state into the economy in any way, on the grounds that bureaucrats who seek to maximize their self-interests will lead to negative performance at the firm level. The developmental state theorists argue that safe- guards – specific structural features of bureaucratic organization and social norms such as trust, reputation, and loyalty – constrain the abuse of power and enable beneficial state involvement in the economy. Neither approach, however, originated from analyses of a tran- sitional economy moving from a planned to market-oriented economy. China has been experiencing double transformations: industrialization and marketization. There is a third approach to this question: The transitional economy approach (Qian, 2002; see also Lin et al., 2003). This approach borrows and integrates insights from both neo-classical economics and developmental state the- ories. Today it can be found in the tradition of Douglass North’s institutionalist theory (Qian, 2002) because of the restructuring of economic and political institutions in a transition economy, for example, secure property rights. So far, one point seems to be commonly accepted—high state political and economic capac- ities are both indispensable prerequisites for successful economic development in a transition economy. Infrastructure (or external environment) that can support and sustain a market economy must be developed with state intervention in one way or another in 1053-5357/$ – see front matter © 2010 Elsevier Inc. All rights reserved. doi:10.1016/j.socec.2010.06.006