Financial Resources and Product Market Development: Strategic Choice and Institutional Processes During China’s Transition

During an economic transition from socialism, market exchange replaces re-distribution. We study firm decisions to enter product markets to understand the factors that influence this process. Managers in Chinese State Owned Enter-prises operated within institutional constraints to make strategic decisions, and state intervention shaped which factors were salient. Firms financed through central government and bond issues relied less on markets. Firms funded through local government moved into markets faster; firms funded by banks were initially faster to markets but slower to markets after bank reform shifted lending policies. Thus, the accessibility, flexibility, and stability of financing shaped decisions about market entrance. KEY WORDS: Chinese transition; organizational theory; market development; economic sociology. A central component of economic transition from state socialism is the replacement of centrally controlled redistribution by market coordination of economic exchange. Accordingly, the development of markets for producer goods has been a dominant feature of China’s transformation. Market ex-change of producer goods occurred prior to reform, but it usually involved only small, rural firms and affected a small fraction of total producer good purchases (Wong, 1986). Economic reform allowed firms to begin to en-gage in market exchange of producer goods for the first time (Naughton, 1995:113). During the 1980s, the state continued to control a large portio