Leading Professor Calls for China’s State-owned Enterprises to Pull Back

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A leading professor from one of China’s top business schools has called for the government to dial down the economic role of state-owned enterprises in order to foster innovation.

Xu Xiaonian, a professor at the China Europe International Business School in Shanghai, said that China’s supply side reforms need to focus on the scaling down of state-owned enterprises and improved protection of private property rights, as opposed to macroeconomic and industrial policy setting.

Speaking at at the 2017 Green Companies Summit, Xu said that the key mission of supply side reforms in China should be the strengthening of private property rights, in order to provide companies with stable expectations of the future and encourage them to engage in long-term innovation and investment.

According to Xu the main purpose of property rights protection was not to attack pirated goods or product rip-offs, but to raise the returns of innovation for entrepreneurs.

As China experiments with mixed-ownership schemes for its major state-owned enterprises, Xu has called for a marked reduction in the scale of government-involvement in “competitive industries,” and the creation of a level playing field on which private enterprises can compete.

According to Xu state-owned enterprises lack the impetus or pressure to innovate, and only private enterprises is capable of innovation.

Xu notes that innovation can only be encouraged via incentivisation mechanisms, as opposed to macroeconomics or industrial policies.

“This incentivisation is embodied by the ability of entrepreneurs to obtain huge returns if their innovations are successful,” said Xu. “If innovations are outdated, then [companies] could be coldly discarded by the market.”

Xu has also called for the relaxation or unwinding of excessive regulation, which he considers to be the chief enemy of innovation.

According to Xu innovation requires not just the free flow of resources but also an environment that encourages free thought, and successful entrepreneurs need to have the courage to experiment as well as fail.

“There  needs to be a relaxed and open thought environment, to let entrepreneurs have the courage to think and to act.”

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