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State-owned Enterprises Need to Build a Mechanism that Tolerates Innovation Failure(No.72, 2016)


By Ma Jun & Xiang Anbo, Members of the Research Team on “Stimulating Vitality of Innovation Players”, Enterprise Research Institute, DRC

Research report No.72, 2016 (Total 4955) 2016-5-27

Abstract: Innovation is a kind of commercial move that can improve the long-term competitiveness of enterprises but also brings high risks. State-owned enterprises (SOEs) boast a large amount of innovation resources, but their potential for innovation has not been fully tapped. A major reason is they lack a mechanism that could tolerate innovation failures. For example, SOEs’ decision-making process excludes the innovative projects with common business risks; the administrative management model of enterprise managers leads to short-sighted policy-making decisions; the government’s evaluation of enterprise management can intensify administrative control whereas it also kills the managers’ willingness to think about making innovation; too much government interference in employment and remuneration of enterprises results in insufficient driving force for innovation; enterprise managers have the worry that innovation failures may cause them to take the accountability of “false decision-making” and “state-owned assets loss”. To trace the reason to its source, it is because SOEs have adopted “shareholder-led” corporate governance model, and the government sectors exercise direct control over enterprises, but they do not possess relevant information, ability and incentive measures for proper business management. It is suggested to reduce direct interference by the government, develop a mixed economy and facilitate state-capital-based innovation instead of SOEs-based innovation.

Key words: state-owned enterprise, innovation, risk of failure