Vertical hierarchies and horizontal cooperation: A transaction cost approach to inter-enterprise relationships in China

In 1978, China began to implement economic reforms in an effort to introduce the incentive advantages of markets to a centrally planned economic system. Increased enterprise autonomy required significant changes in the structures which governed transactions between enterprises. Interviews were conducted in 1988 in six cities at thirty Chinese enterprises in the bicycle and sewing machine industries in order to better understand the nature of these changes and their implications for transaction cost economics.;Two types of micro level hybrid organizations were established in China to organize inter-enterprise relationships: enterprise corporations and horizontal cooperation. Enterprise corporations are economic entities, linking former government organs and the enterprises within their jurisdiction. They attempt to simulate market incentives within a hierarchy. These hybrids often proved to be unstable, and both the incentive advantages of markets and the transaction cost savings of hierarchies had to be partially sacrificed for the corporations to survive. Horizontal cooperation is the name given to hybrids which cross the bureaucratic boundaries of the planning hierarchy and take the form of compensation trade, joint ventures, and licensing agreements. Rapid changes in the market environment caused by economic reforms and continued government involvement in enterprise decisions created tensions between contracting parties located in different regions. Enterprises involved in horizontal cooperation sought government approval to establish joint-stock corporations as a means to resolve these tensions.