RIESEARCH PAPER SIERIlESM Ay / 9 ;4 INDUSTRIAL REFORM AND PRODUCTIVITY IN CHINESE ENTERPRISES ENTERPRISE BEHAVIOR AND ECONoMIC REFORMS: A COMPARATIVE STUDY IN CENTRAL AND EASTERN EUROPE RESEARCH PROJECI OF THE WORLD BANK CHNA SERIES CH-RPS 31 May 1994 COMPARATIVE INVESTMENT BEHAVIOR IN CHINA'S INDUSTRIAL ENTERPRISES by Gary H. Jefferson and John Zhao Department of Economics Brandeis University Dilip Ratha and Inderjit Singh Transition Economics Division Policy Research Department The World Bank ETNSTmON EcoNomics DIVISION POLIcY RESEARCH DEPARTMENT THE WORLD BANK � ь . + ACKNOWLEDGEMENT The research projects on "Enterprise Behavior and Economic Reforms-. A Comparative Study In Central and Eastern Europe", and "Industrial Reforms and Productivity 'n Chinese Enterprises" are research initiatives of the Transition Economics Division (PRDTE) of the World Bank's Policy Research Department and managed by I.J. Singh, Lead Economist. These projects are being undertaken 'n collaboration with the followmig -institutions: for the project in China, The Institute of Economics of the Chinese Academy of Social Sciences (IE of CASS), The Research Center for Rural Development of the State Council (RCRD), and The Economic Systems Reform Institute (ESRI), all in Beijing; and for the projects in Central and Eastern Europe The London Business School (LBS); R6forme et Ouvertures des Syst&mes Econoni iques (post) Socialistes (ROSES) at the University of Paris; Centro de Estudos Aplicados da Uruiversidade Cat6lica Portuguesa (UCP) in Lisbon; The Czech Management Center (CMC) at Celdkovice, Czech Republic; The Research Institute of Industrial Econormics of the Janus Pannornius University, Pe6s (RIIE) *in Budapest, Hungary-, and the Department of Economics at the University of L6di, *in Poland. The research projects are supported with fimds generously provided by: The World Bank- Research Committee; The Japanese Grant Facility; The Portuguese Ministry of Industry and Energy; The Ministry of Research and Space,- The Ministry of Industry and Foreign Trade, and General Office of Planning in France, and the United States Agency for International Development. The Research Paper Series disseminates preliminary findings of work in progress and promotes the exchange of ideas among researchers and others interested 'n the area. The papers contami the views, conclusions, and interpretations of the author(s) and should not be attributed to the World Bank, its Board of Directors, its management or any of its member countries, or the sponsoring institutions or their affiliated agencies. Due to the informality of this series and to make the publication available with the least possible delay, the papers have not been fully edited, and the World Bank accepts no responsibility for errors. The authors welcome any comments and suggestions. Request for perrmssion to quote their contents should be addressed directly to the author(s). 00000 For additional copies, please send your written request to: Transition Economics Division The World Bank 1818 11H" Street, N.W. Room N 11-029x Washington, D.C. 20433 Attention: Mr. Christopher Rollison or FAX your request to (202) 522-1152 唱 CONTENTS A cknow ledgem ent ............................................ Intro d u ction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B ackground ... .. . .. . . .. . .. .. .. .. .. .... . .. .. ... .. .. . .. .. Sources and Allocation of Investment Funds ............................. 2 The Institutional Setting ............................................. 3 M odel I- Gross Investment Demand .................................... 4 M odel II: Net Investment Demand ..................................... 6 C o nclu sions .... . .... . I .. .. I . .. .. .. .... . .. .. ... . ... . . ... 8 R eferences ........................................... 14 UST OF TABLES Table 1: Allocation of Net Fixed Assets in Independent Enterprises ............ 9 Table 2: Allocation of Capital to State and Township and Village Enterprises .... 9 Table 3 -. Sources of Investment .................................... - 10 Table 4: Autocorrelation Coefficients ................................. 10 Table 5 . Authority to Make Investment Decisions ........................ 11 Table 6-. Definition of Variables and Parameters ........................... 11 Table T Extension of the Morris and Liu Model ......................... 12 Table 8: Link Between Gross Profit and Retained Profits ............. ..... 13 Table 9: Expansion Investment Behavior in Chinese Enterprises ............. 13 ьI INTRODUCTION As the most volatile component of national product in the short-run and a basic determinant of economic growth in the long-run, "investment spending is a key component of any nation's econormic activity. It is particularly important in transition economies which are simultaneously attempting to achieve several objectives. These 'include. at the macroeconomic level, price stability and economic growth and, at the microeconomic level. sectoral adjustment and enterprise restructuring. All of these objectives, both macro and micro, depend critically on achieving a close alignment of uiivestment spending with enterprises that can use these resources most efficiently. Dedicating 'investment resources to activities that can generate the highest return 'increases the prospect of rapid growth with stable prices and the reallocation of production to those sectors and enterprises which produce goods and services that are in greatest demand. During China's first decade of reform, the industrial investment system, the subject of this paper, was substantially reformed relative to the 1970s. Still, there continued to be widespread concern that soft-budget constraints, underdeveloped capital markets, and official interference 'n the allocation of scarce 'investment resources were resultmig in vast r'sallocations of capital. Key issues concerning enterprise investment behavior that are raised 'n this paper are: Are patterns of *investment activity in Chinese midustry-both state and non-state --- consistent with neoclassical profit-seeking behavior? To. what extent are the best performing enterprises capturing scarce *investment resources so as to expand capacity where it is most in need? To what extent are enterprises responding to relative price signals? A central phenomenon of China's industrial reforms has been the rapid entry and growth of non-state enterprises, including the collective sector, within which the perforniance of township-village enterprises has been most remarkable. Usmig samples of state enterprises, urban collectives and township-village enterprises, we arc able to compare the *investment behavior of each of these ownership types with predictions for the neoclassical firm. BACKGROUND Although we are aware of no evidence concerning the *investment behavior of township-village enterprises, empirical studies of state enterprise behavior are available. In two of these samples-a small sample of 20 enterprises in Wuhan City and a sample of 110 steel inills-Jefferson and Xu (199 1) find a statistically significant relationship between past levels of profitability and rates of capacity growth. This finding is particularly *interesting "n light of earlier research by Kornai and Matits in the mid 1980s in which they find no evidence of a relationship between profitability and investment activity in Hungary following a decade and a half of gradual reform under the New Economic Mecha*sm. 2 Research Paper Series: China Both of these papers, using Chinese and Hungarian enterprise data, suffer from a similar shortcoming. They intuitivelv assume that in a neoclassical world an association exists between profitability and the growth of production capacity. They do not derive this relationship from an explicit production technology subject to profit-maximizing behavior. One consequence of this ad hoc specification is that it suffers from omitted variables misspecification in which the rental cost of capital has been omitted. Morris and Liu (1993) conducted a more formal investigation of the investment behavior of state-owned enterprises using a sample of 769 enterprises in four provinces for the years 1980-89.' Employing a generalized neoclassical investment model (briefly described in section 3 of this paper), they find a remarkably close fit with the data and conclude: The enterprise reforms already introduced have in general been very successful in providing the incentive mechanisms necessary to generate commercially sound investment decisions, notwithstanding the formal control of the authorities (next-to-last page). The paper extends these studies in two ways. First, it applies the Morris-Liu model to a new set of state enterprise data and, more importantly, to samples of data consisting of urban collective-owned enterprises (UCOEs) and township-village enterprises (TVEs). This allows for a comparison of investment behavior between state industry and collective industry, including TVEs which constitute the second largest sector of Chinese industry. The second innovation of this paper is that it develops a new model which allows us to investigate the relationship between profitability and investment activity. This association between profitability and investment is critical for a reform strategy which relies on "growing out of the plan." If it is not the best performing enterprises, whether large, established .SOEs or newly emerging TVEs, that are capturing scarce investment funds, then there will not be a systematic relationship between performance and expansion. The absence of a robust relationship between profitability and investment will cast serious doubt on the viability of reform through growing out of the plan. SOURCES AND ALLOCATION OF INVESTMENT FUNDS Reform of the financial system in transitional economies involves the shift of investment resources away from traditional state enterprises to new enterprises in the emerging sector. It also entails less reliance on government grants and greater reliance on commercial loans and equity. We examine changes in the allocation of investment resources and in the sources of funds that have occurred since 1978. Allocation of funds: At the beginning of the reform period in 1978, China's state industry accounted for nearly 80% of industrial output. As shown in Table 1, in the early years of reform, the state sector, both industrial and non-industrial assets, also held over 90% of fixed assets. Collective enterprises accounted for only 9% of fixed assets, of which TVEs represented only 5%. As reform accelerated, investment funds rapidly shifted toward the non-state sector. From Table 1, we see that one quarter of the increment to the stock of capital in the enterprise sector during 1988-92 went to the relatively labor-intensive non-state enterprises. Table 2 shows the explosive growth of total fund use by TVE industrial I As a result of missing observations, the pooled analysis typically included a smaller number of 300-330 enterprises. They also required that firms included in the sample have levels of investment that were both positive and less than 40 million yuan. Comparative Investment Behavior in China's Industrial Enterprises 3 enterprises relative to SOEs. In 1979, only 5% of funds were captured by the TVE sector; by 1990, this proportion had risen to 25%. We also see from Table 2 that in both the early and late 1980s, the annual rate of growth of funds dedicated to the TVE sector substantially outpaced the state sector. Sources of funds: Table 3 shows a distinct shift in the source of investment for SOEs away from grants financed through the state budget to domestic loans and other sources, particularly self-raised funds and foreign investment. Whereas in 1983, 41% of industrial state enterprise funds were in the form of state grants, by 1992, grants represented only 6% of total investment funds. In that year, in both the SOE and TVE sector, nearly two-thirds of all funds were outside the state budget and the state banking system. This shift is also reflected in our own sample of state, urban collective and TVEs, as shown in Table 4. These data show that a positive correlation between reliance on state funds and large, state-owned enterprises that are supervised from the center. Smaller TVEs that are most locally supervised rely most heavily for investment on their own funds. Overall, we see, therefore, a shift away from state funds, among both state and non-state enterprises, and within the state sector, we see a shift away from grants to loans. THE INSTITUTIONAL SETTING Changes in China's industrial investment system subsequent to 1978 can be examined in terms of the shifting roles of key institutions involved in the investment process. These include government agencies, the banking system, non-bank financial institutions and the enterprises. Prior to 1979, fixed capital investment had to be approved by the planning agencies and was then allocated through the Ministry of Finance.2 The large majority of investment funds allocated by the state took the form of grants directly financed by the budget, rather than loans. A mono-bank system consisting of the People's Bank of China played a limited role in "policy lending." Beginning in 1979, a series of changes were gradually instituted in the investment approval and investment financing system. These changes were of three major types: Reduction of the central government's role: In addition to phasing out budgetary grants, the central government: (i) decentralized investment approval decisions for investments below certain amounts to lower levels of government, and (ii) when enterprises were able to raise their own investment resources, the central government did not always require approval. Emergence of a banking system: A banking system developed with the following characteristics: (i) Direct budgetary grants for investment were reduced and loans through the banking system came to replace grants; (ii) The mono-bank system was separated into a central bank, the People's Bank of China, and four specialized banks; (iii) While the operations of specialized banks were heavily restricted by the state credit plan, they were permitted some autonomy in selecting borrowers and projects, so that they began to undertake a combination of policy and commercial lending; and (iv) The financial system expanded to include new lending institutions that did not undertake policy lending, including new state banks and urban and rural credit cooperatives, which provided significant amounts of commercial lending to rural TVEs. 2 This section draws heavily on Kumar, Anjali, "China: The Investment System and Public Investment Behavior," World Bank/IFC Office Memorandum, February 16, 1994. 4 Research Paper Series: China Enterprises gained more autonomy: Within the state enterprise system, changes were made which affected enterprise investment decisions. These included: (i) Profits were separated from taxes, permitting enterprises to retain a part of their profits. Thus, retained profits became a potential source of funds for investment. (ii) With the introduction of the contract responsibility system, local governments transferred revenues from enterprises to extrabudgetary funds, which carried no obligations in terms of transfers to the central government. These extrabudgetary funds provided another source of finance for enterprise investment. Under the contract responsibility system, decision-making authority was shifted from various levels of government to state enterprises along several dimensions. In Table 5 presents a summary of the data reported in Jefferson, Lu and Zhao (1994) in which they measure the degree of decision-making reform along 11 dimensions of management. These results show that TVEs enjoy substantially more autonomy than SOEs. On average, along the 11 dimensions of decision-making authority, nearly two-thirds of the TVEs report that the enterprise is the locus of authority, for the SOEs, this average is 45%. For investment decisions, however, autonomy for both SOEs and TVEs is limited. For both ownership types, the majority of enterprises report that investment decisions are made jointly between the enterprise and its supervisory agency. These data show, therefore, that relative to production, pricing, hiring, firing, and compensation decisions, investment decisions tend to be subject to substantial restrictions. MODEL I: GROSS INVESTMENT DEMAND Morris and Liu (1993) derive their generalized investment model from a standard Cobb-Douglas production function Q = AKaLj3, in which each of the symbols carries the standard interpretation. The standard profit maximization mle requires that firms add to the capital stock until the marginal revenue of capital equals the marginal cost of capital. aQ/K= a Q/K = rc/P, (1) Where re is the user cost of capital, and P is the price level of output. Solving equation (1) for the optimal capital stock K* yields, K = a QP/rc (2) Relaxing the unitary restriction of the Cobb-Douglas function on the elasticity of the optimal capital stock with respect to both output and relative prices, Morris and Liu rewrite equation (2) as follows: K'= (aQ)"I(P/rc)o2 (3) where o,>0 and 02>0. They then define the user cost of capital as: rc = Pk(1 + 8)P/(l-t)P2F', (4) where Pk is the price of capital good, i is the interest rate, 8 is the depreciation rate, t is the tax rate and F is a measure of available internal funds. Since enterprises may perceive fund sources differently, Morris and Liu introduce the term F' into the equation to investigate the effect of internal funding on the perceived user cost of capital. A negative value of (D implies that an increase in the availability of internal funds effectively reduces capital's user cost. Comparative Investment Behavior in China's Industrial Enterprises 5 Morris and Liu model the investment process as a partial adjustment process in which a fraction, y, of the difference between the net capital stock and the optimal capital stock is invested in each period: I = y[K' - K-1(1-8)] (5) where O! 0 and a partial adjustment process in which I = y(K* - K-1), then substituting Equation (9) into this process yields: I= yiT/rc (10) Equation (10) summarizes our hypothesis that net investment is determined by gross profit, the rental cost of capital and a partial adjustment process. Note that this specification approximates the estimation equations used by Jefferson and Xu (1991) and Jefferson and Rawski (1994) using Chinese data and Kornai and Matits (1984) using Hungarian data, except that it properly includes the rental cost of capital and an adjustment parameter which their specifications omit. 4 Since the capital stock is measured as end-of-year fixed assets, this is a more reasonable measure than the alternative which is to assume that output can be produced by capital which is not yet installed. Comparative Investment Behavior in China's Industrial Enterprises 7 We now employ the same definition of the rental cost of capital used by Morris and Liu, except that we drop the term for internal funds (F) which they incorporated in an ad hoc manner. Also, because investment behavior depends not only on current profit, but also on the expectation of a future stream of profits, we define expected long- run profit, -n', as an adaptive expectations process determined by current and past levels of profit: = o (11) where co + cl = 1. and M 1 represents a markup in which future levels of expected profit are inflated by real growth and inflation. Substituting Equation (4) (omitting F) and Equation (11) into Equation (10) and taking logs, we obtain: In I= b, + b,Inn + b2n-1 + b3ln(Pk/P)- - b4ln(i+8)-1 + b5ln(1-t)1 (12) where bo = y+nM b, = yc,, b2 = yc2, b3 = yP1, b4 = YO402- The variables are defined as follows: I = net investment: SOEs and COEs: [original value of fixed assets (ovfa) - ovfa(-1) - depreciation fund] TVEs: replacement investment5 'n = gross profit, and all other notation (PK, P, i, 6, and t) are as defined in Table 2. Equation (14) is estimated for each of the ownership types; the results are shown in Table 9. Before examining these results, we note that the profit variable is gross, not net profits or retained earnings. In principle, gross profit is the relevant measure of financial performance, since the taxes and remitted profits may result in measures of retained earnings that distort relative measures of financial performance. To examine the question of the relationship between gross profit and retained earnings, we estimate the following relationship for each of three enterprise types: InRE = a + PInGP + u. The results, shown in Table 8, demonstrate a close, and over time an increasing, association between gross profit (GP) and retained earning (RE). Interestingly, we find that the association is no less strong for SOEs than it is for the other two ownership types. We conclude, therefore, that if our estimates of Equation (12) are not as predicted, this will not be because of the weak association between gross profits and retained earnings. Returning to the regression equation, we note the predictions that the parameter estimates will have the . following signs: b, > 0, b2 > 0, b3 < 0, b4 > 0, and b, < 0. The model also predicts that co and c, will sum to unity and b3 will equal -1. However, because expectations may not adapt as rapidly as assumed by the model and because even 5 We use these different definitions, because SOEs and COEs are required to reinvest their entire depreciations fund. This is not the case for TVEs, so that for TVEs, net investment does not necessarily equal the amount defined by the SOE-COE definition. Also, by using the SOE-COE definition, a larger number of observations are lost due to missing data. 8 Research Paper Series: China within a neoclassical world fins face costs of adjustment (not incorporated into the model), adjustment will be more gradual than predicted by the model.6 Nonetheless, although the magnitudes of the estimates may be less than predicted by the model, their signs should be consistent with the predictions. Examining Table 9, we first note that, with the exception of current profit in the case of TVEs, profit in the current and past periods both substantially affect investment behavior. It is interesting to note, that, for all three ownership types, co + c, falls in the range of 0.70 - 0.77. Moreover, we find that for all of the ownership types we are unable to reject the hypothesis that the magnitude of their response to the three elements of the cost of capital-interest plus depreciation, the relative cost of capital, and the tax rates-are identical. CONCLUSIONS By the last 1980s and early 1990s, China's non-state industrial sector, which in 1990 accounted for about 45% of total industrial output, was capturing over one-quarter of investment resources. Most notably, by 1992, state grants had come to play a negligible role in the finance of state industrial enterprises. Nearly one-half of the investment activity in state industry was financed by retained earnings. In the collective sector, this latter figure was closer to 40%; reliance on domestic loans was somewhat greater than for state enterprises. We see, therefore, that by the late 1980s, for both SOEs and COEs, financial performance had become critical for generating the investment resources required for expansion. We fonnally investigate and compare the investment behavior of state enterprises, urban collectives and TVEs and find that, during the late 1980s, the investment activity of firms of each of these three ownership types was substantially consistent with predictions based on neoclassical modeling of investment behavior. We fit the data to two types of models. Both include the same specification for the rental cost of capital. They differ in that in one model investment is driven by the growth of gross output; in the other it is driven by gross profit. In both cases, all three sets of data fit the models with the predicted signs on output, profit and prices. While the TVEs show somewhat greater responsiveness to changes in output, their responsiveness to changes in profits is indistinguishable from that of state enterprises and urban collectives, although unlike the latter two ownership types, they respond only to past profit and not to contemporaneous changes in profit. In all cases, for both models and all ownership types, the investment behavior of China's industrial enterprises is responsive to changes in interest and depreciation rates, relative price of investment goods and tax rates. We conclude, therefore, that by shifting the sources of investment finance substantially away from grants to the retained earnings of enterprises, the Chinese government has causes the investment activity of industrial enterprises to constrained by available funds. Because these funds are scarce, industrial enterprises have also been forced to be more responsive to relative prices. These results are clearly demonstrated in the data for enterprises of all ownership types. 6 Measurement error will also create an errors-in-variables problem which will bias estimates toward zero. Retained profit may be reported with error. The rental cost of capital is measured with error, since it is derived from the net value of fixed assets, a measure of the total capital stock rather than only that portion on which there are outstanding loans, there is no accounting for subsidies, and the measure is an average measure rather than a measure of marginal cost. Coniparanve Investment Behavior in China's Industrial Enterprises 9 Table 1 Allocation of Net Fixed Assets in Independent Enterprises* (includes both industrial and non-industrial enterprises) Year SOE COE Other 1980 90.3 9.4 0.3 1984 86.3 73.2 0.5 1988 81.4 76.7 1.9 1992 77.8 15.8 6.4 increment: 73.8 74.9 11.4 1988-1992 Table 2 Allocation of Capital to State and Township and Village Enterprises (growth percent per annum) 1979 1990 ratio of TVE funds 5.3 24.9 to SOE funds - 1980-83 1985-90 growth of total fund 5.7 14.9 use by SOEs growth of total fund 14.0 31.9 use by TVEs growth of TVE loans 35.9 27.6 of ABC, RCCs' ABC: Agricultural Bank of China; Rural Credit Cooperatives 10 Research Paper Series: China Table 3 Sources of Investment (industry only) Year State Domestic Foreign Self-Raised Other [ Budget Loans JInvestment Funds SOEs: 83 40.6 14.3 1.7 43.4 n/a 85 26.4 23.1 2.8 40.4 7.3 88 14.7 24.2 9.0 40.5 11.7 92 6.3 30.4 8.0 46.5 8.7 COEs (including TVEs) 83 n/a n/a n/a n/a n/a 85 1.5 37.6 0.9 n/a 60.0 88 0.7 36.3 1.6 41.6 19.8 92 0.1 36.7 2.6 39.8 20.8 source: SSB yearbooks, 1984-93. Table 4 Autocorrelation Coefficients Ownership Scale Level Autonomy State funds Own funds Other Ownership 1.00 Scale 0.38 1.00 Level 0.28 0.39 1.00 Autonomy 0.02 -0.04 -0.09 1.00 State -0.63 -0.31 -0.25 0.03 1.00 funds Own funds 0.68 0.36 0.27 -0.02 -0.82 1.00 Other 0.15 0.09 0.06 -0.01 -0.19 0.06 1.00 ownership: 1 =SOE, 2=UCOE, 3=TVE scale: 1 = large, 2=medium, 3=small level: 1 = central government, 2 = province, 3 = municipality, 4= district, 5 = other autonomy: 0= all planned sales < x < 1 =all market sales state fund: share of total Comparative Investment Behavior in China's Industrial Enterprises 11 Table 5 Authority to Make Investment Decisions SOEs TVEs % % Overall measure of management autonomy* enterprise 45 64 joint 30 22 supervisory agency 25 14 Investment decisions enterprise 14 25 joint 57 60 supervisory agency 29 16 *These % represent simple averages across 11 measures of decision- making authority. For each type of authority, the authors calculate the percentage of enterprises that exercise the authority as compared with the supervisory agency of a joint decision-making process. Table 6 Definition of Variables and Parameters A. Variable names: P': the price of capital goods; /: newly-installed fixed-asset completed; K: Original value of fixed asset (0 VFA); 0: gross value of industrial output (GVIO); P: output price index, (GVIO/GV/080); t: tax rate, (income tax/profit); F: available internal funds, (retained profit + depreciation)/Pk i: effective interest rate, interest payment/(total borrowed funds for both circulating and fixed capital); B. Parameters: a,: elasticity of the desired capital stock with respect to output, o,: elasticity of the desired capital stock with respect to capital's relative price (p k1p) f,6: elasticity of the desired capital stock with respect to the rate of interest plus depreciation, /62: elasticity of the user cost of capital with respect to the tax rate, 0: elasticity of the user cost capital with respect to the availiablity of internal funds; 12 Research Paper Series: China Table 7 Extension of the Morris and Liu Model (gross investment) Morris & Liu World Bank Parameter estimates SOE SOE UCOE TVE a. 0.811 5.449 4.137 0.882 (8.4) (27.561) (10.333) (5.215) a, 0.666 0.312 0.468 0.578 (45.7) (20.449) (14.684) (15.252) a2 -0.357 -0.151 -0.202 -0.107 (9.0) (4.747) (2.945) (2. 143) a, -0.462 -0. 124 -0.207 -0.035 (1 (5.7) (5.457) (6.2 77) (1.330) a4 0.102 0.314 0.335 0.096 (7.4) (10.318) (5.291) (1.597) a5 0.200 0.561 0.468 0.286 (19, 1) (38.487) (14.570) 17.577) CFD 0.144 n.a. n.a. n.a. (5.9) adjusted R2 0.71 0.812 0.845 0.721 no. of obs. 3113 3336 723 439 D-W n.a. 1.039 1.153 1.517 Calculated parameters: o, 0.666 0.312 0.468 0.578 02 0.357 0.151 0.202 0.107 /31 1.294 0.821 1.025 0.327 132 0.286 2.080 1.658 0.900 0 -0.560 -3.715 -2.317 -2.682 Note: The estimation equations used by Morris and Liu included dummy variables representing the firm's type of management system. Comparative Investment Behavior in China's Industrial Enterprises 13 Table 8 Link Between Gross Profit and Retained Profits (a 1% increase in gross profit yields an X% increase in retained profit) 1980-83 1984-87 1988-90 SOEs: 0.76 0.87 0.92 t-stat (71.84 (170.15) (137.25) 0.67 0.79 0. 76 UCOEs: 3 0.76 0.85 0.83 t-stat (78.13) (15.91) (36.71) R 0.55 0.73) 0. 78 TVEs: fl 0.79 0.85 0.86 t-stat (30.96) (35.39) (38.44) R2 0. 70 0.73 0.77 Table 9 Expansion Investment Behavior in Chinese Enterprises (net investment) SOE COE TVE constant 0.895 0.315 0.972 (6.667) (1.007) (2.134) gross 0.227 0.223 -0.017 profit (8.904) (2.702) (0.093) gross 0.485 0.481 0.780 profit (- 1) (17.695) (5.671) (4.493) interest and -0.228 -0.445 -0.246 depreciation (5.002) (-3.318) (-2.278) relative cost -0.228 -0.445 -0.246 of capital (5.002) (3.318) (2.278) tax rate 0.228 0.445 0.246 (5.002) (3.3 18) 2.278 R2 0.436 0.432 0.476 D-W 1.535 1.395 1.579 F-test 0.334 < 2.13 1.373 <2.13 1.092 <5.18 obs 2689 349 53 г � г 14 Research Paper Series: China REFEPENCES Jefferson, Gary and Wenyl Xu (1991) "The Impact of Reform on Socialist Enterprises *in Transition: Structure, Conduct, and Performance *in Chinese Industry," Journal of Comparative Economics 15, 45-64. 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