This paper attempts to explore the economic efficiency and managerial mechanism of township enterprises in Mainland China.
By referring to the concept of X-inefficiency, derived by Professor Leibenstein in 1966, this paper focuses on the discussion of the relationship among factor substitutability, economies of scale and X-inefficiency. Based on this idea, therefore, this paper tries to analyze the managerial mechanism, organizational efficiency and decision making of township enterprises in Mainland China.
This paper is divided into five sections. In section one we first define some basic concepts of X-efficiency and allocative efficiency and ascertain the importance of including the concept of X-inefficiency when analyzing the conduct of enterprises in Mainland China. Section two describes the status quo of the township enterprises. Section three gives the specifications of the models used and the empirical results using the production function and cost function approaches are given in section four. Section five compares the different models and contains the concluding remarks.
Because of the limited available data, we can only analyze the situations for the years 1983 and 1984. Some of the main findings of this study are as follows:
(1) There exists very serious underemployment in township enterprises if we do not consider X-inefficiency when analyzing economic efficiency. Once X-inefficiency is included, not only does labor productivity increase and underemployment disappear, but labor becomes the dominant factor in deciding the performance of enterprises. i.e., low labor productivity is truly a result of less efficient management. Thus, the performance of township enterprises depend indirectly upon managerial efficiency. In order to improve the supervision of enterprises, some devices are needed, such as readjusting the structure of property rights of township enterprises, so as to strengthen the quality of management and let them face a more competitive external environment.
(2) Increasing the extent of specification according to areas will lower average costs. This implies that there exists a close relationship between economies of scale and X-efficiency, but some areas in which township enterprises are more developed face diminishing returns to scale.
(3) Technological progress was neutral between the years 1983 and 1984, i.e., there exists an external economy which has a downward average cost curve.
(4) Although in theory substituting factors of production should be in some way related to X-efficiency, this cannot be proved because of the limited data available.
(5) Although the results obtained from the analyzes of the production function and the cost function are quite similar in some respects, the production function only considers technical efficiency and does not discuss allocative efficiency. Therefore, in order to let the results make sense, the authors suggest that both techniques should be considered together.
