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State-owned Enterprises Need to Establish a Mechanism that Tolerates Innovation Failures


By Ma Jun, Director-General of Enterprise Research Institute, DRC. & Xiang Anbo, Director of Research Office of State-owned Enterprises, Enterprise Research Institute, DRC

In the long term, innovation is an inevitable choice for enterprises whereas in the short term, the process of innovation is full of risks, including technology, market and policy uncertainties. If enterprises make investment in innovation projects, it means that they have shouldered relevant risks. Only by establishing a mechanism that tolerates innovation failures can state-owned enterprises (SOEs) be inspired for innovation drive.

However, the current “shareholder-dominated” corporate governance of SOEs has led to the lack of a mechanism that could tolerate innovation failures. The reason is that the institutions that exercise shareholders’ rights are governments at various levels and government authorized state-owned assets supervision and administration institutions, who can hardly shoulder innovation risks like real shareholders. The disadvantages of “shareholder-dominated” practice are as follows: 1. The decision-making process would filter out innovation projects with normal commercial risks; 2. The administrative management mode would lead to short-term decision making; 3. The annual assessment plus term-of-office-based assessment have weakened people’s willingness to make innovations; 4. Too much government intervention in personnel management and their salary has led to the shortage of innovation drivers; 5. Enterprise managers have the worry that in case they make any failures in innovation projects, they would have to bear the responsibility for making improper decisions and the loss of state assets.

The lack of a mechanism that tolerates innovation failures directly results in SOEs’ unwillingness to engage in high-risk innovation projects. In view of enterprise performance, SOEs make easier achievements in terms of follow-up innovation, but no remarkable ones in terms of leading innovation because the latter has more risks beyond control. In order to change the status quo and build a mechanism that tolerates innovation failures, efforts need to be made in the following aspects. First, we could choose a state-owned enterprise in a competitive industry with leading technology to make pilot practice relating to corporate governance with dominance by board of directors. Second, the mixed ownership reform should be accelerated in competitive industries. Third, it is suggested that endeavour be made to facilitate state-capital-based innovation instead of SOEs-based innovation, and shed more light on capital investment.

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