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Does the Colour of the Cat Matter? The Red Hat Strategy in China's Private Enterprises

Published online by Cambridge University Press:  02 February 2015

Wenhong Chen
Wenhong Chen*
Affiliation:
University of Toronto, Canada
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Abstract

The proliferation of new property rights regimes in transitional economies provided an opportunity to examine the interaction between institutions and organizations. Some private enterprises in China developed the Red Hat strategy whereby they disguised their private ownership by registering as a public-owned organization. Drawing on a national survey, this study investigated how institutional variations, transaction costs and social embeddedness affected the firms’ Red Hat strategy. The findings suggest that private firms preferred a fuzzy property rights arrangement in the early years of market transition. The temporal and regional variation of the institutional environment contributed to the adoption of the Red Hat strategy. High transaction costs — networking cost and resource constraints — were positively related to the adoption of the Red Hat strategy. Social embeddedness also played an important role. The reliance on transaction partners in the public sector increased the pressure to adopt the Red Hat, while connections with high-ranking cadres facilitated the process. However, private firms opted for clearly delineated property rights as the institutional environment improved. In turn, the decisions of individual firms affected the institutional environment at the aggregate level. The Red Hat strategy exemplifies the co-evolution of institutional change and organizational dynamics.

Keywords

institutional changeprivate-owned enterprisesproperty rights regimesocial networkstransitional economy制度变迁产权制度私营企业过渡经济社会网络
Type
Articles
Information
Management and Organization Review , Volume 3 , Issue 1 , March 2007 , pp. 55 - 80
Copyright
Copyright © International Association for Chinese Management Research 2007

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