Description
This study explores the influences on the adoption of ‘‘Western’’ management accounting/control practices by China’s
state-owned enterprises (SOEs). This topic is important given the potential for such practices to affect SOE operations
in the midst of China’s continued privatization programme, and the continued opening of its markets to competition.
In-depth interviews were conducted with managers at four SOEs and two of their joint ventures. These interviews
indicated increased use of a range of Western management accounting/controls in the SOEs. They also shed light on
the factors that influenced the level of adoption. These findings were used to refine a survey instrument for data
collection from 82 other SOEs. The survey indicated significant and predicted influences from use of limited-term
employment contracts, joint venture experience, stock exchange listing, and the availability of training.
The adoption of ‘‘Western’’ management accounting/controls
in China’s state-owned enterprises during economic transition
Neale G. O’Connor
a,
*, Chee W. Chow
b
, Anne Wu
c
a
Department of Accountancy, City University of Hong Kong, Hong Kong, China
b
Vern Odmark Professor of Accountancy, San Diego State University and Visiting Chair Professor,
Hong Kong Polytechnic University, Hong Kong, China
c
National Chengchi University, Taipei, Taiwan
Abstract
This study explores the in?uences on the adoption of ‘‘Western’’ management accounting/control practices by China’s
state-owned enterprises (SOEs). This topic is important given the potential for such practices to a?ect SOE operations
in the midst of China’s continued privatization programme, and the continued opening of its markets to competition.
In-depth interviews were conducted with managers at four SOEs and two of their joint ventures. These interviews
indicated increased use of a range of Western management accounting/controls in the SOEs. They also shed light on
the factors that in?uenced the level of adoption. These ?ndings were used to re?ne a survey instrument for data
collection from 82 other SOEs. The survey indicated signi?cant and predicted in?uences from use of limited-term
employment contracts, joint venture experience, stock exchange listing, and the availability of training.
#2003 Elsevier Ltd. All rights reserved.
Introduction and overview
This study explores the in?uences on Chinese
state-owned enterprises’ (SOEs’) adoption of
‘‘Western’’ management accounting/control prac-
tices. This topic is important because the moder-
nization and restructuring of SOEs is a central
part of China’s current economic reforms (Lee,
2001). Reports to China’s People’s Congress by
two consecutive premiers, Li Peng and Zhu
Rongji, both pointed to the restructuring of SOEs
as being the most important task for their economic
policies (Lee, 2001). Lee (2001, p. 673) notes that
‘the restructuring of SOEs includes changing the
?rm from (being a) quasi-government agency to a
pro?t-oriented corporation, converting the ?nan-
cial statements from the cash-based Soviet style
fund accounting to the accrual-based Western
style ?nancial accounting, and identifying a vehi-
cle for building a new ownership structure and
corporate governance.’ Understanding the factors
that in?uence SOEs’ adoption of Western man-
agement accounting/controls can enhance the
success with which such practices are dis-
seminated, in turn in?uencing the SOEs’ economic
performance, thus the speed of China’s economic
development and the livelihood of millions of its
citizens. This expectation is premised on Western’’
0361-3682/03/$ - see front matter # 2003 Elsevier Ltd. All rights reserved.
doi:10.1016/S0361-3682(02)00103-4
Accounting, Organizations and Society 29 (2004) 349–375
www.elsevier.com/locate/aos
* Corresponding author. Tel.: +852-27888964; fax: +852-
27887944.
E-mail address: [email protected] (N.G. O’Connor).
management accounting/controls being useful for
increasing e?ciency and e?ectiveness, reducing
manager error, enhancing learning (Bruns &
Stalker, 1961; Lawrence & Lorsch, 1967; Shields &
Shields, 1998), as well as for helping to contain
corruption (Perrow, 1986).
Firth (1996) has used a survey to explore the
‘changes in management accounting practices and
the di?usion of accounting ideas from foreign
companies to enterprises in the P.R.C. (People’s
Republic of China)’ (Firth, 1996, p. 638). Labeling
such adoption ‘‘di?usion’’, Firth found that SOEs
that had joint ventures (JVs) with foreign partners
tended to have higher di?usion indices than did
their non-JV SOE counterparts. Nationality of
the foreign JV partner (USA and Europe versus
others), the degree of competition experienced by
the Chinese partner (proxied by the percent of a
JV’s sales for export), and enterprise size were
positively and signi?cantly related to the extent of
di?usion.
While Firth’s study has contributed useful
insights into the topic, its ?ndings are based on
data from 1990 to 1993, a relatively early period in
China’s recent economic reform movement. As
will be detailed in the next section, a number of
dramatic changes have occurred subsequent to
that time. For example, stock exchange listing
became a central platform for a more recent round
of Chinese enterprise reforms (Sinha, 1995). Also,
‘the notion of contracts for jobs based on Western-
style personnel practices (became) . . . sanctioned
in the . . . Law (Labour Law, July 1994).’ (Warner,
1996, p. 216), such that by 1997, individual con-
tracts were an across-the-board phenomenon in
large SOEs (Goodall & Warner, 1999, p. 28). By
examining a more recent period—1996–1999—our
study is able to consider a much broader set of
factors operating in the current Chinese economic
environment.
Another limitation of Firth’s (1996) study is that
it only considered accounting controls. Speci?-
cally, Firth (1996) examined the use of standard
costs and budget responsibility centres. While such
controls are important, they only constitute a
small part of enterprises’ management systems.
Further, both tend to be focused at the lower
management levels. In comparison, the decisions
and actions of managers at higher levels can have
far greater impact on the enterprise. Managers at
these levels also tend to be subject to multiple
controls, only some of which are accounting-
based. Our study focuses on the functional man-
ager level and we consider both accounting and
non-accounting practices, including organi-
zational structure (Chenhall & Morris, 1986;
Bruns & Waterhouse, 1975; Gordon & Nar-
ayanan, 1984), behavioural and output controls
(Merchant, 1985), pro?t centre and discretionary
controls (Chow et al., 1996), and costing and
budget controls (Firth, 1996).
The remainder of this paper is structured as fol-
lows. Section 2 brie?y reviews the theories under-
pinning this study. Then major aspects of China’s
recent economic reforms are discussed within this
theoretical context to yield nine hypotheses. Sec-
tion 3 discusses insights from ?eld-based inter-
views on SOEs’ recent management accounting/
control changes. Section 4 explains the design of a
survey based on the interview ?ndings, and the
results of hypothesis tests using the responses.
Section 5 provides a summary, conclusions and
suggestions for future research.
Theory and hypotheses
Theoretical framework
China’s recent economic reform—in particular,
privatisation and the opening of markets—has
fundamentally changed the economic and reg-
ulatory environments in which SOEs operate
(Child, 1994). Adding to the challenges in adjust-
ing to these changes is the co-existence of market
forces and state in?uences. In particular, opaque,
uncertain, and unpredictable regulatory frame-
works often are formed by both central and local
governments. These not only complicate the orga-
nization of production and marketing, but often
also nullify the strategic planning of SOEs (Lin et
al., 1998). Foreign competition, national market
segmentation, and industrial policy di?erences
across industries and regions further add to the
complexity and information processing demands,
in turn increasing the need for mechanisms capable
350 N.G. O’Connor et al. / Accounting, Organizations and Society 29 (2004) 349–375
of dealing with complexity (Tushman & Nadler,
1978).
The increased environmental complexity, toge-
ther with increased delegation of decision making
authority to SOEs, also has important impli-
cations for the principal-agent relationships within
SOE management. When a centrally planned sys-
tem is demolished, both task and institutional
environments become more uncertain, unpredict-
able, and unveri?able (Naughton, 1995; Nee,
1992; Perkins, 1994). In turn, the increased ambi-
guity that surrounds cause–e?ect relationships
ampli?es the information asymmetry between
higher and lower levels of management, and likely
the latter’s room for discretion. Both factors are
commonly viewed as prime sources of principal-
agent discord (Eisenhardt, 1989; Gerhart & Milk-
ovich, 1990; Williamson, 1975). For example, as
higher level SOE managers face increasing needs
to rely on information obtained from subordinates
(e.g. what costs are, whether workers can be reas-
signed, or what improvements in production tech-
niques can feasibly be introduced), the latter may
hide or even bias the information so as to in?u-
ence superiors’ decisions (Groves et al., 1994).
In the process of responding to such informa-
tion processing and agency issues, institutional
theory suggests that SOEs will adapt their man-
agement practices, which include governance
structures and management accounting/controls,
to gain legitimacy and to ensure their survival
(DiMaggio & Powell, 1983, 1991; Zucker, 1987).
Organizations may adopt practices voluntarily in
response to pressures to conform with accepted
standards of practice, or involuntarily in response
to coercion by powerful institutional forces that
control critical resources (DiMaggio & Powell,
1983, 1991; Scott, 1987).
Agency theory also suggests that SOEs would
increase their use of management accounting/con-
trols to monitor the performance of employees,
because increased information asymmetries make
their behaviour costly or di?cult to observe
(Eisenhardt, 1989; Gerhart & Milkovich, 1990).
‘‘Western’’ management accounting/controls can
orient functional managers toward di?erent
aspects of their organizations and environments,
a?ect risk preferences, and enhance organizational
performance (Fisher & Govindarajan, 1992; Zajac
& Westphal, 1994). Li (1997) demonstrates that
these responses improve both marginal and total
factor productivity. Such responses are also
endorsed by the World Bank (Megginson &
Netter, 2001).
The nature of, and factors in, Chinese enterprises’
adoption of ‘‘Western’’ management accounting/
controls
In the subsections that follow, major aspects of
China’s recent economic and regulatory reforms
will be reviewed as the basis for proposing nine
hypotheses about SOEs’ adoption of ‘‘Western’’
management accounting/controls (see Fig. 1). The
changes are discussed in chronological order, with
particular attention to 1996–1999—the period
covered by the current study.
Employment contracting reforms
Employment contracts with speci?ed terms were
introduced in 1986, with the aim of dismantling
China’s ‘‘iron rice-bowl’’ employment policy
(Hassard et al., 1999; Korzec, 1992; Kaple, 1994).
As part of this reform, material incentives were
slowly introduced, and bonuses became more
important as a method of rewarding e?ort and
productivity (Takahara, 1992). However, by 1990,
only one in 10 workers was employed on a con-
tract basis rather than having a job for life (Kor-
zec, 1992). In 1992, the contracting reforms gained
greater credibility when the Chinese government
decided to steer larger SOEs into the market, and
to hold them responsible for their pro?ts and los-
ses. In July of that year, the State Council issued
the ‘‘Provision for the Transformation of the
Management Mechanism of State Owned Indus-
trial Enterprises.’’ This directive a?ected nearly
11,000 large and medium-sized SOEs, which
together contributed approximately 60 percent of
China’s total industrial taxes and pro?ts. These
SOEs were granted autonomy regarding such aspects
of management as the purchase of raw materials,
production targets, product mix and pricing (Liu
& Eddie, 1995). A new social security system
(incorporating unemployment insurance) was
established to cushion the blow to those workers
N.G. O’Connor et al. / Accounting, Organizations and Society 29 (2004) 349–375 351
displaced, and lifetime tenure for communist party
members (‘‘cadres’’) was abolished to encourage
freer transfer of personnel. By 1997, at least 50% of
employees were on contract terms (Goodall & War-
ner, 1999, p. 28; Hussain & Zhuang, 1997, p. 33).
Based on agency theory, the use of contract
terms, coupled with increased autonomy, creates a
demand for mechanisms to control and monitor
manager performance (Brickley et al., 2000). One
source of this demand is the enterprise owners,
who would gain from safeguarding assets and
improving factor productivity. Demand also could
come from the enterprise managers. With the
introduction of contract terms, managers who are
more capable and/or less prone to corruption,
would have incentives to distinguish themselves
from others via the voluntary adoption of trans-
parent and objective controls. Thus, Hassard et al.
(1999, p. 73) report that in the 1990s, systems of
audit and appraisal, both internal and external,
were increasingly implemented to check that assets
were not being run down or disposed of impro-
perly. More broadly, we hypothesize:
H1. SOEs’ use of Western management account-
ing/controls increases with their use of limited-
term employment contracts.
Market competition and joint venture experience
Concurrent with reforming SOE management,
the Chinese central government moved to expand
the private (non-SOE) economy within China.
1
At
the end of 1992, the private sector made up 36.8%
of the economy, comprised of 15.3 million indivi-
dual and commercial units with 24.6 million
employees and a gross output valued at 113 billion
Yuan (Hussain & Zhuang, 1997, p. 21). Subse-
quently, much broader ranges of industries and
sectors of the economy were opened to the private
sector, and involvement in export-oriented ven-
tures was encouraged (Liu & Eddie, 1995, p.148).
Also, the ‘‘Enterprise Income Tax Law’’ was pro-
mulgated in 1994. Prior to enactment of this law,
each SOE’s target pro?t and remittance to the
government were negotiated individually. By
imposing a standard corporate income tax rate of
33% on all large and medium-sized SOEs, the law
leveled the playing ?eld both across SOEs, as well
as between them and the private enterprises
(Xiang, 1998, pp. 110–111). By 1996, the private
sector had grown to become 63% of the economy,
and by 1999 this ?gure would further increase to
72% (China Statistical Yearbook, 2000, p. 407).
Undoubtedly, this development added sig-
ni?cantly to the competition faced by the SOEs.
Further augmenting change in this direction,
sharp reductions of import and export customs
duties involving more than 4800 groups of com-
modities were announced in 1997, e?ectively
1
The private economy includes collective and individual-
owned enterprises where the state does not hold a controlling
share.
Fig.1. Theoretical framework for the study.
352 N.G. O’Connor et al. / Accounting, Organizations and Society 29 (2004) 349–375
reducing the customs duties level by 26% (Zhu,
1997).
As Groves et al. (1994, p. 185) note, the result of
increased competition from other state ?rms and
new, non-state ?rms is a demand for ‘‘extra dis-
cipline.’’ The monopoly positions granted to SOEs
under central planning quickly disappear when
foreign investors bring in their technological and
organizational expertise and o?er more innovative
products and superior customer responsiveness.
This change provides both an impetus and oppor-
tunity for mimetic isomorphism, whereby SOEs
perceive legitimate foreign enterprises as models to
imitate (Guthrie, 1999). For example, Li (1997, p.
1101) notes that market competition ‘generated
considerable pressure to improve both cost and
quality,’ which in turn increased the need for more
formal management controls. Firth (1996, p. 640)
notes, ‘The change toward a free enterprise market
system in the P.R.C. represents a major economic
shock to many Sino companies and leads to what
might be viewed as a serious performance gap
where the accounting systems developed under the
socialist philosophy are perceived as wholly
inadequate for a capitalist structure.’ Firth (1996)
found a positive relation between di?usion of
management accounting procedures and the per-
centage of the Chinese JV partner’s sales from
exports. This ?nding is consistent with higher
market competition focusing the Chinese enter-
prises’ management on e?ciency, pro?tability,
and meeting customers’ needs, in turn promoting
greater use of management accounting/controls to
account for and to manage these factors. Thus,
following Firth, we hypothesize:
H2. SOEs that face higher market competition
make greater use of Western management
accounting/controls.
Another notable development in this period is
the increased legitimization of foreign investment
in China. The main vehicle for this move was
government encouragement of SOEs’ joint ven-
turing (JV) with foreign multinational corpora-
tions. During the 1990s growth in foreign
investment by way of joint ventures increased
substantially. In 1992, foreign funded enterprises
contributed 7% of the gross industrial output.
This ?gure had grown to 12% by 1996, and it was
nearly 16% in 1999 (China Statistical Yearbook,
2000). As Firth (1996) reported, the adoption of
new management accounting techniques was more
widespread among those SOEs that had joint
ventures with foreign enterprises. By engaging in a
JV, a SOE has increased opportunity to model
itself on the foreign partner. In addition, the for-
eign partner often assisted the change process
through on-the-job learning and formal in-house
training, support of outside training in local
schools, and trips overseas (Child & Markoczy,
1993; Firth, 1996; Yan & Gray, 1994). Involve-
ment in a JV also may introduce elements of
coercive isomorphism, with the foreign JV partner
imposing perceived best practices on a joint ven-
turing SOE as part of an export value chain. Both
forces would push towards greater use of Western
management accounting/controls. Hence, we
hypothesize:
H3. SOEs with joint venture experience make
greater use of Western management accounting/
controls.
Stock exchange listing
In September 1997, the Chinese Communist
Party’s (CCP’s) Fifteenth Congress endorsed sev-
eral aggressive state-enterprise reform initiatives.
These reforms were ‘intended to bring into Chi-
nese SOEs modern management mechanisms and
what are seen in China as important elements of
the ‘‘Western,’’ or capitalist, company structure,
such as overall company direction by a board of
directors that answers to shareholders.’ (Hassard
et al., 1999, p. 70). The CCP also a?rmed the
importance of the stock market and open market
competition. One key initiative was moving from
an experiment to o?cial endorsement of the
transformation of small-scale SOEs into share-
holding cooperatives (Smyth, 1998, p. 122).
Another initiative was dividing up SOEs into sub-
companies for eventual formation into either (a)
shareholding companies destined for stock-market
listing and whose shares can be bought by anyone,
including individuals, or (b) limited-liability com-
panies, whose shares can only be bought by insti-
N.G. O’Connor et al. / Accounting, Organizations and Society 29 (2004) 349–375 353
tutional investors, such as state-owned banks or
insurance companies, other SOEs, or state trade
unions (Hassard et al., 1999, p. 71). To put this
initiative into perspective, China’s stock markets
were established in 1990 (Shanghai) and 1991
(Shenzhen) with 13 ?rms listed in 1991. By 1996,
the number of listed ?rms had grown to 604, with
market capitalization of 938.4 billion Yuan. By
1998, there were 851 ?rms listed with a market
capitalization of 1950 billion Yuan (China Secu-
rities Regulatory Commission, 2001).
Raising capital through stock o?erings can be
expected to create demands for accountability. An
additional source of pressure was the central gov-
ernment’s increased acceptance of poorly mana-
ged listed SOEs being acquired by private
companies (Cheng, 2001). Both factors would cre-
ate pressures on listed SOEs to adopt management
systems that enhance organizational transparency,
e?ciency, and productivity (Cheng, 2001; Meg-
ginson & Netter, 2001; Pannier, 1996). For exam-
ple, Sinha (1995, p. 19) notes that:
Raising capital through stock markets
became necessary to ?nance large projects.
The functioning of such markets requires
information about the underlying structures
of prospective investments. This process in
turn requires better accounting and transpar-
ent record keeping by the companies. Hence
there was further pressure on adopting better
accounting methods.
Thus we hypothesize:
H4. Listing on stock exchanges increases SOEs’
use of Western management accounting/controls.
Government in?uence and enterprise size
Beyond privatisation and the opening of mar-
kets, China’s recent reforms also were aimed at
‘reducing government interference in enterprise
management.’ (Hassard et al., 1999, p. 70). Shlei-
fer and Vishny (1994, p. 1015) have argued that
the e?ective restructuring or modernization of
public enterprises largely depends on the extent to
which employment control rights are transferred
to management in the process of corporatization.
In China’s SOEs, government in?uence still exists
via the power of communist party o?cials to
intervene in enterprise decision-making, including
the appointing of SOE managers, cadres and
boards of directors (Hassard et al., 1999, pp. 75–
76). But such in?uence is not uniform, as ?rms in
di?erent industries and regions are subject to
idiosyncratic treatment by governmental policies
(Lin et al., 1998).
2
For example, SOEs in more
decentralized industries and coastal cities tend to
have greater freedom in human resource adminis-
tration. And even within the same industry or
region, not all SOEs have state representatives as
board members or asset-management supervisors.
In addition to constraining SOEs’ latitude for
change, government in?uence also can shift SOE
management’s attention away from e?ciency or
pro?tability. For example, the government may
emphasize providing employment over e?ciency
out of a concern for social stability. Both the hin-
drance and goal displacement from government
in?uence can reduce SOE managers’ intention to
sharpen managerial discretion, improve organi-
zational e?ciency, and adopt advanced enterprise
management systems (Branie, 1996; Peng &
Heath, 1996; Child, 1994; Groves et al., 1994).
For example, Goodall and Warner (1999) found
that government in?uence impeded the implemen-
tation of modern human resource management
practices. Based on the preceding discussion, we
hypothesize:
H5. SOEs’ use of Western management accounting/
controls decreases with their extent of being subject
to government in?uence.
Another characteristic of government in?uence is
that di?erent treatments are accorded large vs. small
SOEs (Lee, 2001; Goodall & Warner, 1999; Zhu,
2
It is possible that the di?erent treatments are the result of
the government rationally determining the level of in?uence
needed based on the level of liberalization forces faced by SOEs
across and within particular industries. Some (e.g. Chen, 2000)
have argued that in industries with less growth and employ-
ment opportunities, the government exercises greater in?uence
over human resources, thereby constraining the adoption of
more e?cient forms of enterprise.
354 N.G. O’Connor et al. / Accounting, Organizations and Society 29 (2004) 349–375
1999). Large SOEs help to bear a heavier share of the
burden from retirement pensions, other social-wel-
fare costs, and redundant workers (Lin et al., 1998,
p. 425; Goodall &Warner, 1999, pp. 33–34) and thus
have garnered preferential support during various
reform stages. For example, as part of expecting
large SOEs to alleviate the unemployment problem,
‘in 1996, the government supported a total of 300
large SOEs and ?fty-seven conglomerate groups. By
the end of 1998, it will have increased its support to
512 large SOEs and 120 conglomerates.’ (Chen,
1998, p. 29). In contrast, for small SOEs, the gov-
ernment has adopted a ‘‘let go’’ strategy. The head
of a World Bank Mission in China commented as
follows on the SOE reforms launched at the 15th
Party Congress in 1997: ‘(M)any of the smaller
enterprises are ending up as non-state operations
or cooperatives or are being taken over by the
managers or workers in some form which is close
to privatisation. . .Basically the government is say-
ing ‘‘We are going to let them go and it is the only
practical thing.’’ ’ (Seidlitz, 1998, p. 8). Since gov-
ernment support is likely to reduce both the
urgency and leeway for adopting more formal and
transparent management accounting/controls, we
hypothesize:
H6. SOEs’ use of Western management account-
ing/controls decreases with their size.
3
Chinese management norms and enterprise age
Yet another factor that can impede the adoption
of more formal (and presumably impartial) and
transparent processes and controls is Chinese
management norms. Such norms generally re?ects
a preference for well-established routines and
procedures (including an iron-rice bowl mentality
(security of employment)), formal centralized
bureaucracy, respect for status and seniority, and
a strong sense of egalitarianism (Baird et al., 1990;
Von Glinow & Teagarden, 1988; Davidson, 1987).
Attributes like these are antithetical to Western
management accounting/controls that: a) facilitate
information processing through the decentraliza-
tion of decision making, and b) deal with agency
costs through the use of more formal performance
evaluation routines. Chinese management
norms—speci?cally in respect to the prevalence of
coalitions between workers and supervisors, and
between managers and government representa-
tives—had been found to be a formidable barrier
in the adoption of past reforms (Cauley & Sand-
ler, 1992; Lee, 1990). Since practices require time
to arise and to become entrenched, they are likely
to be an obstacle to change in older SOEs. Hence,
we hypothesize:
H7. SOEs’ use of Western management account-
ing/controls decreases with the presence of
Chinese management norms.
H8. SOEs’ use of Western management account-
ing/controls decreases with their age.
Availability of training
At the organization level, an important in?u-
ence on management accounting/control practices
is the availability of training and organizational
participants’ capability to work within a more
formal and transparent environment. Training
facilitates the development of absorptive capa-
city—the capability to acquire, assimilate, and
exploit information regarding appropriate inno-
vation (Cohen & Levinthal, 1990). Since increased
use of Western management accounting/controls
implies greater responsibility and accountability
on the part of managers, it would require SOE
managers to have this absorptive capability. For
managers of Chinese SOEs, training can come
from multiple sources, including on-the-job learn-
ing, formal in-house training, and outside training
in local schools (Child & Markoczy, 1993; Yan &
Gray, 1994). It also can be conducted by organi-
zational members (e.g. senior managers) or exter-
nal parties (e.g. joint venture expatriates or
consultants). We hypothesize:
3
In contrast to H6, H5 predicts that government in?uence
will also vary across SOEs of similar size due to other govern-
ment purposes (e.g. industry and location). Thus it is possible
for H5 to be independent of H6.
N.G. O’Connor et al. / Accounting, Organizations and Society 29 (2004) 349–375 355
H9. SOEs’ use of Western management account-
ing/controls increases with the availability of
training.
Method
A two-stage data collection approach was used
to increase our ability to capture the phenomenon.
The ?rst stage consisted of in-depth interviews at
four SOEs and two of their joint venture partners.
These interviews served two purposes. First, they
provided insights into the SOEs’ management
accounting/control practices in their own right.
For this purpose, the advantage of the interview
approach was that it permitted following up on
‘‘how’’ and ‘‘why’’ questions (Yin, 1989) to ‘map
novel, dynamic, and/or complex phenomena
ignored or inadequately explained by existing the-
ories.’ (Keating, 1995, p. 69). The second purpose
was to inform the development of a survey instru-
ment, which was used to collect data from a larger
sample of SOEs for hypothesis testing. The design
and ?ndings of the interview study are discussed in
the remainder of this section.
Interview study
We limited our sample to manufacturing enter-
prises due to their importance in the current
Chinese economy, and to control for extraneous
variation (Eisenhardt, 1989) across industry sec-
tors. Firms were selected from two industries
likely to di?er on factors that could a?ect the
motivation to adopt more formal and transparent
management accounting/control systems (e.g.
market competition and technological dependence
on foreign investment). Also, the chosen entities
had to have existed for at least several years so that a
history of operating data would be available.
Visits were made in December 1997 to six
enterprises in Shanghai. Two each of these were
SOEs from the food and electronics industries.
One SOE from each industry was a JV partner
(JV-SOE) and one was a non-joint venturing SOE
(non-JV SOE). This mix was aimed at permitting
the e?ects of joint venturing to be manifest, as
engaging in joint ventures had been identi?ed by
Firth (1996) as a major di?usion driver. The two
remaining enterprises were JVs with which the
JV-SOEs were involved. They provided a base of
comparison for information gathered from their
SOE-JV partners. The selected enterprises and
interviewees were contacted through the university
network in Shanghai.
The visit to each enterprise involved in-depth,
one-on-one interviews with one senior and one
functional manager, making 12 interviews in total.
All interviews were conducted in Chinese with two
of the co-authors present, and took between two
to three hours per enterprise.
4
Interviewees were
sought from two management levels because the
controls applicable or applied to each may di?er.
Obtaining responses from more than one source
also facilitated triangulation of data.
A pre-determined interview protocol was fol-
lowed which included a combination of closed-
ended and open-ended questions. The interviews
were conducted in the same order.
5
The Appendix
presents the open-ended question protocol used
for the senior manager interviews. A similar pro-
tocol was used for interviewing the functional
managers. To ensure data accuracy, we conducted
numerous checks (Lincoln & Guba, 1985) by
which the original interviewees veri?ed our tran-
scribed scripts and our interpretations of their
responses.
Interview questionnaire
The structured part of the interview ques-
tionnaire contained questions about the manage-
4
Interest shown by the interviewees to our study and method
was evident on a number of accounts. Most managers com-
mented on the high relevance of questions across all areas. They
also reported that the nature of the interview data gathering
exercise was their ?rst experience. Their previous involvement had
been limited to completing surveys for studies conducted at a
distance. Consequently, most managers were quite forthcoming
with examples in follow-up to many of our questions.
5
We have to acknowledge the possibility that the interviewees
may have been sensitized to our research expectations (as re?ected
in the structured questions in sections one and two), and that this
may have created demand e?ects on their responses with respect
to the in?uences on changes during the 3-year period. Mitigating
this concern is our having asked about the level of environmental
and government in?uence in the second section before asking
about changes in the third and fourth sections.
356 N.G. O’Connor et al. / Accounting, Organizations and Society 29 (2004) 349–375
ment accounting/controls in use at two di?erent
points in time, as well as the forces, facilitators
and barriers associated with the change in these
uses.
6
The questionnaire (and sequence of the
interview) was divided into four sections: organi-
zational characteristics, environmental and gov-
ernment in?uences on the organization,
management accounting/control practices, and
other in?uences on change (forces, barriers and
facilitators). Each section contained items that
asked for responses on a 7-point Likert scale, fol-
lowed by open-ended questions. For each item,
responses were sought relating to the time of the
interview (December 1997) and three years pre-
vious (1995). Our expectation was that by con-
sidering the extent and sign of change across time,
the interviews would better elucidate the dynamics
of the change process, in turn enriching design of
the survey instrument. Choice of the 3-year time
span was based on extant ?ndings that such a time
window is needed to capture changes in organiza-
tional systems and practices (Chenhall, 1997;
Simons, 1987). There were 144 scaled-response
items in all.
7
The ?rst section on Organizational Character-
istics comprised six questions on the organization,
together with size (number of employees) (Firth,
1996), sales growth rate (Libby & Waterhouse,
1997), percentage of output exported (Firth,
1996), prior JV experience (Firth, 1996) and
organizational performance (Beamish, 1987). The
second section comprised environmental and
government in?uences on the organization. The
questions on Environmental In?uences (14 items)
were adapted from Gordon and Narayanan (1984)
and Chenhall and Morris (1986), with several
items added to re?ect the China environment. In
addition to the two points in time, the 14 items
were asked with respect to two sets of scales. The
?rst scale was the predictability of the environ-
ment (1=Highly unpredictable, and 7=Highly
predictable), and the second scale was the extent
of the environment’s impact on the survival or
success of the ?rm (1=Very low impact, and
7=Very high impact). The scale for Government
In?uence (5 items) was developed from the litera-
ture (e.g. Hassard et al., 1999), in conjunction with
the authors’ prior experience in case study visits to
both SOEs and joint ventures in China. The items
focused on the internal vs. external composition of
the board of directors, percentage shareholdings
by di?erent parties and the role of the government
representative. Answers were sought with respect
to how di?erent aspects of governance structure
(including% stock ownership by outside directors,
and the role of the government representative)
a?ected the decisions that the interviewee had
made for the part of the enterprise that they man-
age, using a seven-point Likert scale (1=No e?ect,
and 7=Great e?ect).
The third section probed management account-
ing/control practices with seven sets of measures.
The name of each set, along with the response
scale and sources from which it was developed,
are as follows: Formalization of Organizational
Structure: 14 items (1=Extremely informal—not
documented, to 7=Extremely formal—fully
documented) (Roth et al., 1991; Chenhall &
Morris, 1986). Decentralization: 14 items (1=No
delegation to you, to 7=Full delegation to you)
and four other items (1=Not used, to 7=Used to
great e?ect) (Brickley et al., 2000; Chow et al.,
1996; Gordon & Narayanan, 1984). TQC Proce-
dures: nine items (1=Not used, to 7=Used to
great e?ect), Financial Controls: 17 items (1=Not
used, to 7=Used to great e?ect) and Performance
Evaluation Style and Performance-based Incentives:
six items (1=Not used, to 7=Used to great e?ect)
were adapted from six sources—Firth (1996),
Chow et al. (1996), Shields and Young (1993),
Briers and Hirst (1990), Simons (1987), and
Khandwalla (1972). Integrating Mechanisms: 10
items (1=Not used, to 7=Used to great e?ect)
adapted from ?ve sources—Roth et al. (1991),
6
While the theoretical model and hypotheses in this study
uses the term ‘‘in?uence’’ to encompass several factors, these
factors are described as forces, facilitators and barriers to
change in the ?eld interview section to provide an orderly pre-
sentation of the ?ndings in as original detail as possible.
7
The instrument was ?rst developed in English. Then it was
translated into Chinese by one of the bi-lingual research team
members. The other bi-lingual research team member then
made changes and corrections to this translation. The instru-
ment was then evaluated by the ?rst bi-lingual team member in
discussion with the third research team member and ?nal
changes made. The English version of the questionnaire is
available from the ?rst author on request.
N.G. O’Connor et al. / Accounting, Organizations and Society 29 (2004) 349–375 357
Adler (1991), Bartlett and Ghoshal (1989), Pascale
(1985), Van Maanen and Schein (1979), and
Degree of Formal Controls: 12 items (1=Strongly
agree, to 7=Strongly disagree) based on Birnberg
and Snodgrass (1988). Interviewees also were
asked to provide a ratio that re?ected the mix of
formal/informal processes at their management
level and the immediate level below.
The fourth section contained open-ended ques-
tions on the purposes behind the use of manage-
ment accounting/controls and the forces, barriers,
and facilitators to change in such use. Both senior
and functional level managers were asked ques-
tions covering the accounting/control mechan-
isms. Questions on environmental in?uences,
corporate governance and performance were only
posed to the senior managers, as they are more
likely to be knowledgeable about such issues.
Table 1 shows that in all four SOEs, the use of
management accounting/controls had increased
between 1995 and 1997. This table also shows that
a broad range of management accounting/controls
was used by all four SOEs.
Content analysis
Content analysis (Yin, 1989) of the open-ended
responses involved one of the authors classifying
each cited event or action in terms of four cate-
gories—decisions a?ected by change in manage-
ment accounting/control use, forces, barriers and
facilitators of change. This analysis was performed
in April 1998. It was repeated six months later
(September, 1998) by another author. Comparing
the two sets of results led to reclassifying several
decisions a?ected by the change. Then, a total count
of citations was used to rank events or factors under
each of the four categories. Table 2 presents
examples of the forces, facilitators and barriers
taken from the content analysis. These data are
reported separately for each enterprise and within
each, the level (senior vs. functional management,
identi?ed as ‘‘S’’ and ‘‘F’’, respectively) of the
interviewee.
Purposes and level of use of management
accounting/controls
The reasons given by the interviewees for their
enterprises’ increased use of management
accounting/controls were generally consistent with
expectations: (1) To formalise the decision making
process. A senior manager (Food-JV-SOE) noted:
‘Pressure to increase sales and to decrease costs has
forced management to formalise the use of man-
agement teams to make decisions in the areas of
production quality, cost evaluation, sales and ?nan-
cial management.’ (2) To reduce manager decision
error. A functional manager (Food-JV-SOE)
noted: ‘With the dynamic market situation sub-unit
managers need more management standards to do a
good job.’ Another functional manager (Elec-JV-
SOE) put it this way: ‘The market has become more
complicated, so lower level managers need more
formal guidelines/procedures to follow. There is now
less time and margin for errors in decision making.’
(3) To increase the performance accountability of
managers below the top level. All enterprises in
the interview sample had experienced substantial
annual growth over the past three to ?ve years
(range: 15% to 40%), and more formal proce-
dures were seen as facilitating the evaluation of
lower level managers. One functional manager
(Food-SOE) put it this way, ‘Performance eval-
uation has become more formalised in order for
senior management to understand the higher and
lower performing functional-level managers.’ A
senior manager (Elec-JV-SOE) noted:
Increase in size (average revenue growth of
35% per year during the past ?ve years) has
caused a focus on the desire to minimize incor-
rect decisions and to increase the CEO’s repu-
tation. At the sub-unit manager level, greater
formalisation was needed to support greater
decentralization whereby functional managers
have greater control over the operation sit-
uation of the lowest managers.
The open-ended responses also provided speci?c
examples of decisions that had become more for-
malised across the SOEs (except Elec-SOE). These
related to sales and marketing procedures, human
resource management, budgeting, and operations
management. For both non-JV-SOEs (Elec-SOE
and Food-SOE), budgeting and cost control pro-
cedures were reported to have become more for-
malised. A senior level manager of Elec-SOE
358 N.G. O’Connor et al. / Accounting, Organizations and Society 29 (2004) 349–375
Table 1
Quantitative ?ndings from on-site interviews
a
Joint
venture
State-owned
enterprise partner
State-owned
enterprise
Joint venture
Food-JV
State-owned
enterprise partner
State-owned
enterprise
Elec-JV Elec-JV-SOE Elec-SOE Food-JV-SOE Food-SOE
Panel A: sign and percentage change in management accounting/control components—senior and functional manager responses
b
1. Formalization of organization structure 2% 39% 27% 16% 4% 35%
2. Decentralization 3% 10% 29% 22% 6% 13%
3. Approval and TQC procedures 2% 4% 13% 2% 10% 23%
4. Financial controls 1% 34% 9% 0% 0% 30%
5. Performance-based incentives 0% 25% 25% 0% 29% 14%
6. Performance evaluation style—rule-based 0% 8% 0% 32% 41% 51%
7. Performance evaluation style—relationship-based 2% À7% 0% À11% 18% À16%
8. Integrating mechanisms 0% À7% 23% 17% 35% 42%
9. Control system formality 2% 6% 29% 23% 33% 54%
Agreement between senior and functional managers
on sign of change
High High High High Moderate High
Panel B: mix of formal/informal controls (total=100)
Senior manager: 1995 1997 1995 1997 1995 1997 1995 1997 1995 1997 1995 1997
Senior manager level 90/10 65/35 20/80 40/60 70/30 90/10 70/30 90/10 80/20 90/10 70/30 90/10
Perception about functional manager level 50/50 70/30 70/30 80/20 60/40 90/10 70/30 90/10 50/50 70/30 70/30 80/20
Functional manager:
Functional manager level 40/60 60/40 40/60 70/30 40/60 60/40 45/55 65/35 30/70 40/60 60/40 80/20
Agreement between senior and functional managers
about the degree and sign of change
c
:
At functional manager level High High Moderate Moderate Moderate High
Towards more formal procedures High High Moderate Moderate Moderate High
a
Based on site visits to four state-owned enterprises (SOEs) and two joint ventures in December 1997.
b
% change was determined by dividing the di?erence between responses for 1997 and 1995 (3 years previous), by the 1995 response. All items were determined based
on the average of senior and functional manager respondents.
c
Example: for Elec-JV, 50/50 to 70/30 is rated as being highly similar to 40/60 to 60/40 in sign and extent of change.
N
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noted, ‘Formal procedures have been adopted for
the purchase of assets. For example, approvals are
now required for the purchase of equipment costing
more than 100,000 Renminbi.’ The extent of
change was seen as depending on the SOE’s start-
ing point, in part related to its JV experience. A
manager of Elec-JV-SOE observed, ‘The JV’s
adoption of such procedures was higher to begin
with due to the contractual arrangements with the
initial set up of the JV. In contrast, the SOEs are
evolving from a socialist state system of control to
a more market-based system, hence they have
experienced greater change towards the adoption of
management accounting controls.’ Finally, man-
agers from all four SOEs noted increased
communications about sales and human resource
problems.
In?uences on change
Most of the managers indicated that a major
motivator for change was increased market com-
petition and/or complexity, with six interviewees
explicitly citing this factor (see Table 2). A senior
manager (Food-SOE) observed: ‘Competition is
the main external force for change. This force is
also enhanced internally through the CEO putting
pressure on the senior managers to do better.’
Another senior manager (Elec-SOE) noted: ‘The
market situation has become more open: competi-
tive environment.’ Other major forces for change
Table 2
In?uences on management accounting/control change in SOEs: content analysis of on-site interviews
Examples of in?uences extracted from content analysis
a,b
ELEC FOOD Total
number of
JV-SOE SOE JV-SOE SOE times cited
Forces for change
1. Increased market competition and/or complexity S,F S S S,F 6
2. Increased market size, company sales and employee growth S,F F 3
3. Holding company pressure, concern for CEO reputation S S S 3
4. Government requests—to JV, mandated management system, tax and labour
regulations
S S 2
Facilitators of change
1. In-house training—on the job, from senior managers S,F S,F S S,F 7
2. Training in local schools F S S,F 4
3. Procedures transferred from the JV S,F S 3
4. Sending Chinese managers to the JV/overseas for training and development S,F S 3
5. Frequent communication from senior managers/informal meetings between
sta?
S F S 3
6. Training by government o?cials S S 2
Barriers to change
1. Lack of managerial ability by functional or lower level management S,F S,F S F 6
2. Threat to the Chinese (culture and philosophy) way of doing things—
Concern about loss of power, in?uence associated with having a good
relationship with immediate superiors/Reliance on traditional bureaucracy/
Loss of security of long term employment
F S,F S S,F 6
3. Outdated performance/reward system—no connection between performance
and rewards
F S,F 3
4. Insu?cient (or outdated) training, encouragement and/or government
support
S,F S 3
5. Government control over parts of organizational operations (e.g. labour
management and investment)
S,F S 3
6. Time requirement to learn and understand new techniques and procedures S F 2
a
Number of cites by four senior and four functional managers in four state-owned enterprises in two industries: electrical (ELEC) and
Food (n=8). Senior managers are identi?ed as ‘‘S’’ and functional managers as ‘‘F’’. Only factors cited by at least two SOEs are shown.
b
Only the SOE interviewee responses are shown. Details of the JV data can be obtained from the ?rst author on request. Dates refer to
beginning of 1995 and end of 1997.
360 N.G. O’Connor et al. / Accounting, Organizations and Society 29 (2004) 349–375
were seen as holding company in?uence, concern
for the CEO’s reputation, increased market size,
and company growth (both were cited three
times). Government in?uence in the form of man-
dated management systems, tax and labour reg-
ulations were each considered a force for change
by managers from two of the four entities.
Focusing on facilitators of change, seven inter-
viewees cited in-house training as being an impor-
tant factor. Training in local schools, and
technology transfers from the JV were cited by
four and three interviewees, respectively. Both
JV-SOEs in the interview sample had adopted the
approaches of their foreign JV partners in pro-
duction, marketing and selling. The functional
manager from JV-Elec-SOE said: ‘There are forces
from foreign joint venture partners to require the
company to follow their procedures.’ The senior
manager from Elec-JV-SOE observed: ‘The joint
venture provided necessary knowledge on how to
manage product channels and markets. . .(It) pro-
vided the channel for learning more formal (sophisti-
cated) purchasing and marketing management
practices.’ At the same time, the degree to which the
JV partner facilitated change was seen as being
dependent on the Chinese JV partner (holding com-
pany). While Elec-JV-SOE obtained training from
the Elec-JV, Food-JV-SOE did not reap the same
bene?t from its joint venture. The Food-JV-SOE’s
holding company did provide a source of training,
but its limited participation in the Food-JV (only
interested in the pro?ts) led to little knowledge being
transferred to Food-JV-SOE from the Food-JV.
The interviews also shed light on the nature of
various barriers. In citing lack of managerial ability
as a barrier, a functional manager fromElec-JV-SOE
put it this way: ‘It is time consuming to get managers
up to speed with market developments and organiza-
tion changes.’ A senior manager from Elec-SOE
shed further light on the nature of this barrier:
‘Managers’ personal ideas about the business often
were in con?ict with the new environment they wanted
to create, especially with older managers.’ The com-
ment of a functional manager from Elec-JV further
suggested that some barriers and facilitators may be
connected: ‘Traditional Chinese concepts held by
management pose a barrier to new management tech-
niques, therefore more training is required.’
Comments also were made about a personal
sense of insecurity from change, revealing that some
of the barriers might be connected. A functional
manager from Elec-JV-SOE stated: ‘The change
usually brought a signal of reduced demand of
labour to workers.’ Along the same vein, a senior
manager (Food-SOE) shared this experience: ‘The
employees did not accept change because they felt
that they would stay in the company permanently.
Making no change would be better. They felt that
any change is associated with a change of employ-
ment terms within the company.’ In most cases
(except Food-JV-SOE), the perceived threat to
personal security was seen as the result of chal-
lenges to the Chinese management norms held by
managers. These especially related to the sense of
personal relationships (for rewards and promo-
tion) and a sense of position and authority based on
seniority (age) and term with the ?rm. As a senior
manager (Food-SOE) put it: ‘Older management has
gained signi?cant personal power through the old
hierarchical system of bureaucracy based on personal
relationships. Therefore they have been slow to accept
the use of more formal procedures required to e?ec-
tively compete in the marketplace.’ In turn, this
reluctance to change may have contributed to
employees’ lack of trust in senior management.
Relating to external intervention, a senior man-
ager of Food-JV-SOE noted: ‘The senior managers
want to learn new ways of increasing competitive-
ness but are constrained by what the government
wants to teach them through the holding company.
The government still uses its own ideas to manage
both the holding company and its subsidiaries. The
government has not changed the management of the
holding company, nor has it changed the content of
training provided.’ Another senior manager (Food-
JV-SOE) put it this way: ‘The management (of
Food-JV-SOE) has no decision rights in the areas
of human resources, investments and asset sales.
The lack of rights in the de-employment of labour
has been a major barrier to decreasing their costs.
For example, they would like to decrease their
employment headcount by 20% but have been pre-
vented from doing so by the holding company.’
Taken as a whole, the interview ?ndings con-
?rmed many of our expectations about the level of,
and in?uences on Chinese SOEs’ use of Western
N.G. O’Connor et al. / Accounting, Organizations and Society 29 (2004) 349–375 361
management accounting/controls. They also yiel-
ded useful insights into the avenues whereby
impacts arise. As we explain in the next section,
these insights were incorporated into the survey
used to collect data for hypothesis testing.
Survey
Survey instrument
The survey instrument was based on the closed-
ended items in the interview questionnaire, with
modi?cations to re?ect the interview ?ndings. The
instrument had three parts—organizational
characteristics, management accounting/control
mechanisms, and in?uences on change.
For management accounting/control mechan-
isms (see Table 3) several changes were made
based on the interview ?ndings. For example,
decentralization (18 items in the interview instru-
ment) was reduced to four items associated with
approval procedures that were perceived by the
interviewees to have changed the most during the
period studied. Both degree of control system
formality and formal/informal process mix were
removed because their content is substantially
covered by the retained items. Questions on the
purposes of the management accounting/controls
also were dropped. This was due, in part, to con-
cern for the length of the survey.
8
Furthermore,
we had not pro?ered hypotheses about such pur-
poses. Instead, the e?ects or bene?ts of the man-
agement accounting/controls were assumed, and
the interview ?ndings had quite clearly supported
the validity of these assumptions.
For organizational characteristics and in?uences
on change, feedback from the interviews led to
items being added to those listed in the interview
instrument. Speci?cally, six items were inserted on
the nature of employment contracts, two relating
to exchange listing, and two on government in?u-
ence. For example, % of employees on limited-term
employment contracts comprised two items/groups
(managers and non-managers) and required the
respondents to indicate on a 5 point scale (100, 75,
50, 25, 0%) the percentage of each group that are
on contract basis. Interview feedback also led us
to modify the measures of in?uences of change.
For example, we modi?ed the measure of inte-
grating mechanisms (informal controls) and com-
bined it with the items used to measure the
availability of training (see Table 4). This was in
response to the interview ?nding that integrating
mechanisms were used to facilitate the adoption of
management accounting/controls, rather than
being used as controls themselves. In similar fashion,
the list of 14 environmental in?uences was merged
with forces for change to remove redundancy that
existed in the interview instrument. Several items
comprising in?uences on change (including Govern-
ment In?uence) are shown in Table 4.
Finally, to reduce the threat of common
response (Young, 2000), we used response scales
for several independent variables (e.g. market
competition, joint venture experience, stock
exchange listing, size and age) that were di?erent
from the dependent variable. Also, the scale for
government in?uence was in the same direction
(1=No e?ect, and 7=Great e?ect) as the scale for
‘‘Western’’ management accounting/controls, thus
reducing the chance that common response bias
would allow us to accept hypothesis 5.
Survey sample
SOEs to be surveyed were identi?ed based on
information from the Ministry of Foreign Eco-
nomic Relations and Trade. As with the inter-
views, we sought industries likely to yield a spread
on the factors implicated in the hypotheses. The
sample was selected from ?ve industries: retail,
electronics, textiles, plastics, and building materi-
als. Government protected and closely controlled
industries, such as telecommunications and
mining, were excluded to avoid adding unneces-
sary noise to the data.
The survey was sent in 1999 to one senior and
one functional level manager in each of 82 SOEs
(sample population). The plan was to use the two
responses from each SOE as a validation check on
8
The concern with survey length was a response to the
interviewed managers’ shared admonition (and our personal
experience) that the survey instrument had to be kept short to
have a reasonable chance of being completed.
362 N.G. O’Connor et al. / Accounting, Organizations and Society 29 (2004) 349–375
each other. Forty-seven SOEs returned only one
completed response each, despite repeated follow
up communications. Thirty of these 47 responses
were from functional managers. In conjunction
with the two responses each from the remaining 35
SOEs, there were a total of 117 respondents, 65 of
which were functional managers (representing a
functional manager response rate of 79.27%). All
respondents indicated that they had been at the
SOE for at least several years.
Table 3
Factor analysis of management accounting/controls
Factor 1 Factor 2 Factor 3 Factor 4 Factor 5
1996 1999 1996 1999 1996 1999 1996 1999 1996 1999
To what extent has your company established formal and written procedures/guidelines that employees must follow relating to the
following items?
a
Formal Procedures (8 items)
Development of new products or services 0.489 0.586
Hiring and ?ring of managerial personnel 0.679 0.696
Allocating the budget among alternate uses 0.620 0.526
Pricing decisions 0.563 0.740
From which sources to obtain inputs 0.749 0.774
Scheduling of production operations 0.669 0.837
Distribution of products/outputs 0.726 0.466
Manager performance evaluation processes 0.605 0.408
To what extent has each of the following management procedures and processes been used in your company?
b
Approval procedures (4 items)
Hiring new employees (e.g. headcounts) 0.608 0.492
Spending discretionary programme money 0.800 0.820
Making capital expenditures 0.820 0.840
Formal sector-level committee meetings 0.867 0.787
Total quality control procedures (6 items)
Total quality control circles 0.767 0.780
Statistical quality control of production 0.786 0.808
Materials requirement planning procedures 0.687 0.525
Internal auditing procedures 0.438 0.545
Performance or operational auditing 0.642 0.580
Standard costs and variance analysis 0.549 0.468
Budget targets (5 items)
Use of budgeting for:
(a) Cash/working capital 0.742 0.715
(b) Sales or Pro?ts 0.825 0.734
(c) Production 0.773 0.671
Annual or quarterly income/cost targets 0.679 0.699
Monthly income/cost targets 0.446 0.618
Performance targets (4 items)
Use of budget goals for the purposes of:
(a) Selecting employees for promotion 0.518 0.779
(b) Determining employees’ bonus pay 0.751 0.569
(c) Selecting employees for recognition 0.634 0.743
Merit-based compensation contracts 0.521 0.658
Eigenvalues 2.561 10.073 1.686 2.656 10.527 1.516 1.769 1.825 1.343 1.383
a
1=Extremely informal—not documented, 4=moderate formality, 7=extremely formal—fully documented.
b
0=N/A or not used, 1=no e?ect or used to no e?ect, 4=some e?ect or used to some e?ect, 7=great e?ect or used to great e?ect.
N.G. O’Connor et al. / Accounting, Organizations and Society 29 (2004) 349–375 363
We ran an independent samples t-test of means
between the two respondents from each SOE (for
the 35 SOEs with two respondents) across all
items, and found non-signi?cant (P>0.05) di?er-
ences in all but one item (formalization of pricing
decisions). The hypothesis test results were quali-
tatively identical between using the average of the
two responses for these 35 SOEs and the single
responses from the other 47 SOEs, and using only
the functional level manager responses. For sim-
plicity, only the latter results are presented below.
Table 5 presents summary demographic data on
the survey sample. On average, the SOEs had 3014
employees, with 68.75% of managers and non-
managers being on contract terms that averaged
5.31 years in duration. Forty-four (53.66%) of the
SOEs were currently listed on a stock exchange
with an average listing history of about four
years.
9
Forty-eight (58.54%) SOEs had JV
experience. During the 1990 reforms, larger
SOEs were more likely to be selected for listing
or participating in a joint venture (Chen, 1998).
Hence, we tested whether there was a size dif-
ference between listed and non-listed SOEs and
JV and non-JV SOEs. No signi?cant di?erences
were found. The average size of JV SOEs was
2682 employees, as compared to 3483 for non-
JV SOEs. The average size of listed SOEs was
3323 employees, as compared to 2657 for non-
listed SOEs.
The level of and in?uences on use of management
accounting/controls
Factor analysis using the varimax rotation yiel-
ded ?ve distinct management accounting/control
mechanism groupings (formal procedures,
approval procedures, total quality control, budget
targets, and performance targets, see Table 3), and
Table 4
Factor analysis of in?uences on the use of management accounting/controls
Factor 1 Factor 2 Factor 3 Factor 4
Government In?uence (2 items)
Government ministry representative on the board of directors 0.80
Activities of government representative in your ?rm 0.90
Market Competition (5 items)
Increased competition from foreign (overseas) enterprises 0.78
Increased competition from domestic enterprises 0.72
Increased market size 0.73
Company growth in sales 0.78
Desire to achieve ISO9000 or similar quality certi?cation 0.61
Availability of Training (5 items)
In-house or on-the-job training by Chinese managers 0.73
Training provided in local schools 0.79
Training provided by government o?cials 0.62
Frequent communication, informal meetings with senior managers 0.75
Sending Chinese managers overseas for training and development 0.55
Chinese Management Norms (3 items)
Employees’ personal concern for security of employment 0.71
Employees’ lack of trust in the senior management 0.75
Employees’ concern for loss of power and in?uence associated with
having a good relationship with immediate superiors
0.74
Eigenvalues 1.178 1.471 3.481 2.175
9
Four of the SOEs had only been listed during 1998 or
1999. Analyses were run with and without these particular
SOEs and the results for employment contract term and stock
exchange listing were unchanged.
364 N.G. O’Connor et al. / Accounting, Organizations and Society 29 (2004) 349–375
four in?uences (government in?uence, market
competition, availability of training, and Chinese
management norms, see Table 4).
10
All of these
aggregate measures had acceptable reliability, as
indicated by Cronbach alphas above 0.60, the
generally accepted range of construct reliability
(Carmines & Zeller, 1979).
Table 5, Panel B shows that all of the manage-
ment accounting/controls had moved towards
greater formalisation and explicitness between
1996 and 1999.
11
Since our hypotheses had
focused on levels, attribution of di?erences in
1999 must recognize that the SOEs in the sample
probably di?ered on the focal characteristics at
the beginning of our study period (i.e. 1996), and
these characteristics could have a?ected their use
Table 5
Summary statistics: in?uences on, and use of management accounting/controls
Alpha Mean S.D. Min. Max.
Panel A—in?uences on change
% on limited-term employment contract—
managers and non-managers
68.75% 30.89% 0.00% 100.00%
Market Competition 0.67 23.75 5.31 5.00 35.00
Joint Venture Experience? 0=No, 1=Yes 58.54% 49.57% 0.00% 100.00%
Stock Exchange Listing? 0=No, 1=Yes 53.66% 50.02% 0.00% 100.00%
Government In?uence 6.34 3.59 0.00 14.00
Enterprise Size– Full time equivalent employees 3014.37 4131.76 100.00 32250.00
Chinese Management Norms 0.66 12.21 3.65 3.00 19.00
Enterprise Age (years) 19.91 19.10 3.00 97.00
Availability of Training 0.75 17.75 6.06 5.00 29.00
Alpha 1999 (1996) Mean S.D. Min. Max.
Panel B—management accounting/control (MAC) use—1999 (1996)
Formal procedures 0.89 (0.89) 39.49 (31.70) 7.55 (7.51) 17 (15) 56 (56)
Approval procedures 0.87 (0.88) 21.14 (17.21) 5.39 (6.26) 1 (1) 28 (28)
Total quality control procedures 0.82 (0.87) 27.25 (21.49) 7.71 (8.86) 3 (0) 40 (39)
Budget targets 0.84 (0.89) 24.43 (19.57) 6.37 (7.26) 0 (0) 35 (35)
Performance targets 0.76 (0.74) 15.67 (12.55) 6.05 (5.47) 0 (0) 28 (28)
Aggregate level of use of MACs (27 items) 0.92 127.98 (102.52) 25.23 (27.62) 37.00 (27.00) 172.00 (172.00)
Number of ?rms with
0 or (À) change
Mean S.D. Min. Max.
Panel C—sign of change in management accounting/control use—1996–1999
a
Formal procedures 27 3.94 3.81 À6.00 8.00
Approval procedures 26 1.80 2.05 À4.00 4.00
Total quality control procedures 26 2.78 2.86 À6.00 6.00
Budget targets 23 2.51 2.50 À5.00 5.00
Performance targets 37 1.63 2.09 À4.00 4.00
Aggregate sign of MACs change (27 items, Alpha=0.95) 18 12.67 11.88 À25.00 27.00
a
The sign of the di?erence between 1996 and 1999 responses for each management accounting/control practice (À1, 0 or 1) is summed for an additive
sign score for each control and for the overall MACs change.
10
As noted earlier, our interviews also indicated that man-
ager ability was a possible in?uence on the adoption of man-
agement accounting/controls. However, our survey responses
did not distinguish this measure from training. First, the factor
analysis resulted in the reward system being agglomerated with
manager ability, such that we do not have a pure measure of the
ability construct. Second, a strong positive correlation (P
This study explores the influences on the adoption of ‘‘Western’’ management accounting/control practices by China’s
state-owned enterprises (SOEs). This topic is important given the potential for such practices to affect SOE operations
in the midst of China’s continued privatization programme, and the continued opening of its markets to competition.
In-depth interviews were conducted with managers at four SOEs and two of their joint ventures. These interviews
indicated increased use of a range of Western management accounting/controls in the SOEs. They also shed light on
the factors that influenced the level of adoption. These findings were used to refine a survey instrument for data
collection from 82 other SOEs. The survey indicated significant and predicted influences from use of limited-term
employment contracts, joint venture experience, stock exchange listing, and the availability of training.
The adoption of ‘‘Western’’ management accounting/controls
in China’s state-owned enterprises during economic transition
Neale G. O’Connor
a,
*, Chee W. Chow
b
, Anne Wu
c
a
Department of Accountancy, City University of Hong Kong, Hong Kong, China
b
Vern Odmark Professor of Accountancy, San Diego State University and Visiting Chair Professor,
Hong Kong Polytechnic University, Hong Kong, China
c
National Chengchi University, Taipei, Taiwan
Abstract
This study explores the in?uences on the adoption of ‘‘Western’’ management accounting/control practices by China’s
state-owned enterprises (SOEs). This topic is important given the potential for such practices to a?ect SOE operations
in the midst of China’s continued privatization programme, and the continued opening of its markets to competition.
In-depth interviews were conducted with managers at four SOEs and two of their joint ventures. These interviews
indicated increased use of a range of Western management accounting/controls in the SOEs. They also shed light on
the factors that in?uenced the level of adoption. These ?ndings were used to re?ne a survey instrument for data
collection from 82 other SOEs. The survey indicated signi?cant and predicted in?uences from use of limited-term
employment contracts, joint venture experience, stock exchange listing, and the availability of training.
#2003 Elsevier Ltd. All rights reserved.
Introduction and overview
This study explores the in?uences on Chinese
state-owned enterprises’ (SOEs’) adoption of
‘‘Western’’ management accounting/control prac-
tices. This topic is important because the moder-
nization and restructuring of SOEs is a central
part of China’s current economic reforms (Lee,
2001). Reports to China’s People’s Congress by
two consecutive premiers, Li Peng and Zhu
Rongji, both pointed to the restructuring of SOEs
as being the most important task for their economic
policies (Lee, 2001). Lee (2001, p. 673) notes that
‘the restructuring of SOEs includes changing the
?rm from (being a) quasi-government agency to a
pro?t-oriented corporation, converting the ?nan-
cial statements from the cash-based Soviet style
fund accounting to the accrual-based Western
style ?nancial accounting, and identifying a vehi-
cle for building a new ownership structure and
corporate governance.’ Understanding the factors
that in?uence SOEs’ adoption of Western man-
agement accounting/controls can enhance the
success with which such practices are dis-
seminated, in turn in?uencing the SOEs’ economic
performance, thus the speed of China’s economic
development and the livelihood of millions of its
citizens. This expectation is premised on Western’’
0361-3682/03/$ - see front matter # 2003 Elsevier Ltd. All rights reserved.
doi:10.1016/S0361-3682(02)00103-4
Accounting, Organizations and Society 29 (2004) 349–375
www.elsevier.com/locate/aos
* Corresponding author. Tel.: +852-27888964; fax: +852-
27887944.
E-mail address: [email protected] (N.G. O’Connor).
management accounting/controls being useful for
increasing e?ciency and e?ectiveness, reducing
manager error, enhancing learning (Bruns &
Stalker, 1961; Lawrence & Lorsch, 1967; Shields &
Shields, 1998), as well as for helping to contain
corruption (Perrow, 1986).
Firth (1996) has used a survey to explore the
‘changes in management accounting practices and
the di?usion of accounting ideas from foreign
companies to enterprises in the P.R.C. (People’s
Republic of China)’ (Firth, 1996, p. 638). Labeling
such adoption ‘‘di?usion’’, Firth found that SOEs
that had joint ventures (JVs) with foreign partners
tended to have higher di?usion indices than did
their non-JV SOE counterparts. Nationality of
the foreign JV partner (USA and Europe versus
others), the degree of competition experienced by
the Chinese partner (proxied by the percent of a
JV’s sales for export), and enterprise size were
positively and signi?cantly related to the extent of
di?usion.
While Firth’s study has contributed useful
insights into the topic, its ?ndings are based on
data from 1990 to 1993, a relatively early period in
China’s recent economic reform movement. As
will be detailed in the next section, a number of
dramatic changes have occurred subsequent to
that time. For example, stock exchange listing
became a central platform for a more recent round
of Chinese enterprise reforms (Sinha, 1995). Also,
‘the notion of contracts for jobs based on Western-
style personnel practices (became) . . . sanctioned
in the . . . Law (Labour Law, July 1994).’ (Warner,
1996, p. 216), such that by 1997, individual con-
tracts were an across-the-board phenomenon in
large SOEs (Goodall & Warner, 1999, p. 28). By
examining a more recent period—1996–1999—our
study is able to consider a much broader set of
factors operating in the current Chinese economic
environment.
Another limitation of Firth’s (1996) study is that
it only considered accounting controls. Speci?-
cally, Firth (1996) examined the use of standard
costs and budget responsibility centres. While such
controls are important, they only constitute a
small part of enterprises’ management systems.
Further, both tend to be focused at the lower
management levels. In comparison, the decisions
and actions of managers at higher levels can have
far greater impact on the enterprise. Managers at
these levels also tend to be subject to multiple
controls, only some of which are accounting-
based. Our study focuses on the functional man-
ager level and we consider both accounting and
non-accounting practices, including organi-
zational structure (Chenhall & Morris, 1986;
Bruns & Waterhouse, 1975; Gordon & Nar-
ayanan, 1984), behavioural and output controls
(Merchant, 1985), pro?t centre and discretionary
controls (Chow et al., 1996), and costing and
budget controls (Firth, 1996).
The remainder of this paper is structured as fol-
lows. Section 2 brie?y reviews the theories under-
pinning this study. Then major aspects of China’s
recent economic reforms are discussed within this
theoretical context to yield nine hypotheses. Sec-
tion 3 discusses insights from ?eld-based inter-
views on SOEs’ recent management accounting/
control changes. Section 4 explains the design of a
survey based on the interview ?ndings, and the
results of hypothesis tests using the responses.
Section 5 provides a summary, conclusions and
suggestions for future research.
Theory and hypotheses
Theoretical framework
China’s recent economic reform—in particular,
privatisation and the opening of markets—has
fundamentally changed the economic and reg-
ulatory environments in which SOEs operate
(Child, 1994). Adding to the challenges in adjust-
ing to these changes is the co-existence of market
forces and state in?uences. In particular, opaque,
uncertain, and unpredictable regulatory frame-
works often are formed by both central and local
governments. These not only complicate the orga-
nization of production and marketing, but often
also nullify the strategic planning of SOEs (Lin et
al., 1998). Foreign competition, national market
segmentation, and industrial policy di?erences
across industries and regions further add to the
complexity and information processing demands,
in turn increasing the need for mechanisms capable
350 N.G. O’Connor et al. / Accounting, Organizations and Society 29 (2004) 349–375
of dealing with complexity (Tushman & Nadler,
1978).
The increased environmental complexity, toge-
ther with increased delegation of decision making
authority to SOEs, also has important impli-
cations for the principal-agent relationships within
SOE management. When a centrally planned sys-
tem is demolished, both task and institutional
environments become more uncertain, unpredict-
able, and unveri?able (Naughton, 1995; Nee,
1992; Perkins, 1994). In turn, the increased ambi-
guity that surrounds cause–e?ect relationships
ampli?es the information asymmetry between
higher and lower levels of management, and likely
the latter’s room for discretion. Both factors are
commonly viewed as prime sources of principal-
agent discord (Eisenhardt, 1989; Gerhart & Milk-
ovich, 1990; Williamson, 1975). For example, as
higher level SOE managers face increasing needs
to rely on information obtained from subordinates
(e.g. what costs are, whether workers can be reas-
signed, or what improvements in production tech-
niques can feasibly be introduced), the latter may
hide or even bias the information so as to in?u-
ence superiors’ decisions (Groves et al., 1994).
In the process of responding to such informa-
tion processing and agency issues, institutional
theory suggests that SOEs will adapt their man-
agement practices, which include governance
structures and management accounting/controls,
to gain legitimacy and to ensure their survival
(DiMaggio & Powell, 1983, 1991; Zucker, 1987).
Organizations may adopt practices voluntarily in
response to pressures to conform with accepted
standards of practice, or involuntarily in response
to coercion by powerful institutional forces that
control critical resources (DiMaggio & Powell,
1983, 1991; Scott, 1987).
Agency theory also suggests that SOEs would
increase their use of management accounting/con-
trols to monitor the performance of employees,
because increased information asymmetries make
their behaviour costly or di?cult to observe
(Eisenhardt, 1989; Gerhart & Milkovich, 1990).
‘‘Western’’ management accounting/controls can
orient functional managers toward di?erent
aspects of their organizations and environments,
a?ect risk preferences, and enhance organizational
performance (Fisher & Govindarajan, 1992; Zajac
& Westphal, 1994). Li (1997) demonstrates that
these responses improve both marginal and total
factor productivity. Such responses are also
endorsed by the World Bank (Megginson &
Netter, 2001).
The nature of, and factors in, Chinese enterprises’
adoption of ‘‘Western’’ management accounting/
controls
In the subsections that follow, major aspects of
China’s recent economic and regulatory reforms
will be reviewed as the basis for proposing nine
hypotheses about SOEs’ adoption of ‘‘Western’’
management accounting/controls (see Fig. 1). The
changes are discussed in chronological order, with
particular attention to 1996–1999—the period
covered by the current study.
Employment contracting reforms
Employment contracts with speci?ed terms were
introduced in 1986, with the aim of dismantling
China’s ‘‘iron rice-bowl’’ employment policy
(Hassard et al., 1999; Korzec, 1992; Kaple, 1994).
As part of this reform, material incentives were
slowly introduced, and bonuses became more
important as a method of rewarding e?ort and
productivity (Takahara, 1992). However, by 1990,
only one in 10 workers was employed on a con-
tract basis rather than having a job for life (Kor-
zec, 1992). In 1992, the contracting reforms gained
greater credibility when the Chinese government
decided to steer larger SOEs into the market, and
to hold them responsible for their pro?ts and los-
ses. In July of that year, the State Council issued
the ‘‘Provision for the Transformation of the
Management Mechanism of State Owned Indus-
trial Enterprises.’’ This directive a?ected nearly
11,000 large and medium-sized SOEs, which
together contributed approximately 60 percent of
China’s total industrial taxes and pro?ts. These
SOEs were granted autonomy regarding such aspects
of management as the purchase of raw materials,
production targets, product mix and pricing (Liu
& Eddie, 1995). A new social security system
(incorporating unemployment insurance) was
established to cushion the blow to those workers
N.G. O’Connor et al. / Accounting, Organizations and Society 29 (2004) 349–375 351
displaced, and lifetime tenure for communist party
members (‘‘cadres’’) was abolished to encourage
freer transfer of personnel. By 1997, at least 50% of
employees were on contract terms (Goodall & War-
ner, 1999, p. 28; Hussain & Zhuang, 1997, p. 33).
Based on agency theory, the use of contract
terms, coupled with increased autonomy, creates a
demand for mechanisms to control and monitor
manager performance (Brickley et al., 2000). One
source of this demand is the enterprise owners,
who would gain from safeguarding assets and
improving factor productivity. Demand also could
come from the enterprise managers. With the
introduction of contract terms, managers who are
more capable and/or less prone to corruption,
would have incentives to distinguish themselves
from others via the voluntary adoption of trans-
parent and objective controls. Thus, Hassard et al.
(1999, p. 73) report that in the 1990s, systems of
audit and appraisal, both internal and external,
were increasingly implemented to check that assets
were not being run down or disposed of impro-
perly. More broadly, we hypothesize:
H1. SOEs’ use of Western management account-
ing/controls increases with their use of limited-
term employment contracts.
Market competition and joint venture experience
Concurrent with reforming SOE management,
the Chinese central government moved to expand
the private (non-SOE) economy within China.
1
At
the end of 1992, the private sector made up 36.8%
of the economy, comprised of 15.3 million indivi-
dual and commercial units with 24.6 million
employees and a gross output valued at 113 billion
Yuan (Hussain & Zhuang, 1997, p. 21). Subse-
quently, much broader ranges of industries and
sectors of the economy were opened to the private
sector, and involvement in export-oriented ven-
tures was encouraged (Liu & Eddie, 1995, p.148).
Also, the ‘‘Enterprise Income Tax Law’’ was pro-
mulgated in 1994. Prior to enactment of this law,
each SOE’s target pro?t and remittance to the
government were negotiated individually. By
imposing a standard corporate income tax rate of
33% on all large and medium-sized SOEs, the law
leveled the playing ?eld both across SOEs, as well
as between them and the private enterprises
(Xiang, 1998, pp. 110–111). By 1996, the private
sector had grown to become 63% of the economy,
and by 1999 this ?gure would further increase to
72% (China Statistical Yearbook, 2000, p. 407).
Undoubtedly, this development added sig-
ni?cantly to the competition faced by the SOEs.
Further augmenting change in this direction,
sharp reductions of import and export customs
duties involving more than 4800 groups of com-
modities were announced in 1997, e?ectively
1
The private economy includes collective and individual-
owned enterprises where the state does not hold a controlling
share.
Fig.1. Theoretical framework for the study.
352 N.G. O’Connor et al. / Accounting, Organizations and Society 29 (2004) 349–375
reducing the customs duties level by 26% (Zhu,
1997).
As Groves et al. (1994, p. 185) note, the result of
increased competition from other state ?rms and
new, non-state ?rms is a demand for ‘‘extra dis-
cipline.’’ The monopoly positions granted to SOEs
under central planning quickly disappear when
foreign investors bring in their technological and
organizational expertise and o?er more innovative
products and superior customer responsiveness.
This change provides both an impetus and oppor-
tunity for mimetic isomorphism, whereby SOEs
perceive legitimate foreign enterprises as models to
imitate (Guthrie, 1999). For example, Li (1997, p.
1101) notes that market competition ‘generated
considerable pressure to improve both cost and
quality,’ which in turn increased the need for more
formal management controls. Firth (1996, p. 640)
notes, ‘The change toward a free enterprise market
system in the P.R.C. represents a major economic
shock to many Sino companies and leads to what
might be viewed as a serious performance gap
where the accounting systems developed under the
socialist philosophy are perceived as wholly
inadequate for a capitalist structure.’ Firth (1996)
found a positive relation between di?usion of
management accounting procedures and the per-
centage of the Chinese JV partner’s sales from
exports. This ?nding is consistent with higher
market competition focusing the Chinese enter-
prises’ management on e?ciency, pro?tability,
and meeting customers’ needs, in turn promoting
greater use of management accounting/controls to
account for and to manage these factors. Thus,
following Firth, we hypothesize:
H2. SOEs that face higher market competition
make greater use of Western management
accounting/controls.
Another notable development in this period is
the increased legitimization of foreign investment
in China. The main vehicle for this move was
government encouragement of SOEs’ joint ven-
turing (JV) with foreign multinational corpora-
tions. During the 1990s growth in foreign
investment by way of joint ventures increased
substantially. In 1992, foreign funded enterprises
contributed 7% of the gross industrial output.
This ?gure had grown to 12% by 1996, and it was
nearly 16% in 1999 (China Statistical Yearbook,
2000). As Firth (1996) reported, the adoption of
new management accounting techniques was more
widespread among those SOEs that had joint
ventures with foreign enterprises. By engaging in a
JV, a SOE has increased opportunity to model
itself on the foreign partner. In addition, the for-
eign partner often assisted the change process
through on-the-job learning and formal in-house
training, support of outside training in local
schools, and trips overseas (Child & Markoczy,
1993; Firth, 1996; Yan & Gray, 1994). Involve-
ment in a JV also may introduce elements of
coercive isomorphism, with the foreign JV partner
imposing perceived best practices on a joint ven-
turing SOE as part of an export value chain. Both
forces would push towards greater use of Western
management accounting/controls. Hence, we
hypothesize:
H3. SOEs with joint venture experience make
greater use of Western management accounting/
controls.
Stock exchange listing
In September 1997, the Chinese Communist
Party’s (CCP’s) Fifteenth Congress endorsed sev-
eral aggressive state-enterprise reform initiatives.
These reforms were ‘intended to bring into Chi-
nese SOEs modern management mechanisms and
what are seen in China as important elements of
the ‘‘Western,’’ or capitalist, company structure,
such as overall company direction by a board of
directors that answers to shareholders.’ (Hassard
et al., 1999, p. 70). The CCP also a?rmed the
importance of the stock market and open market
competition. One key initiative was moving from
an experiment to o?cial endorsement of the
transformation of small-scale SOEs into share-
holding cooperatives (Smyth, 1998, p. 122).
Another initiative was dividing up SOEs into sub-
companies for eventual formation into either (a)
shareholding companies destined for stock-market
listing and whose shares can be bought by anyone,
including individuals, or (b) limited-liability com-
panies, whose shares can only be bought by insti-
N.G. O’Connor et al. / Accounting, Organizations and Society 29 (2004) 349–375 353
tutional investors, such as state-owned banks or
insurance companies, other SOEs, or state trade
unions (Hassard et al., 1999, p. 71). To put this
initiative into perspective, China’s stock markets
were established in 1990 (Shanghai) and 1991
(Shenzhen) with 13 ?rms listed in 1991. By 1996,
the number of listed ?rms had grown to 604, with
market capitalization of 938.4 billion Yuan. By
1998, there were 851 ?rms listed with a market
capitalization of 1950 billion Yuan (China Secu-
rities Regulatory Commission, 2001).
Raising capital through stock o?erings can be
expected to create demands for accountability. An
additional source of pressure was the central gov-
ernment’s increased acceptance of poorly mana-
ged listed SOEs being acquired by private
companies (Cheng, 2001). Both factors would cre-
ate pressures on listed SOEs to adopt management
systems that enhance organizational transparency,
e?ciency, and productivity (Cheng, 2001; Meg-
ginson & Netter, 2001; Pannier, 1996). For exam-
ple, Sinha (1995, p. 19) notes that:
Raising capital through stock markets
became necessary to ?nance large projects.
The functioning of such markets requires
information about the underlying structures
of prospective investments. This process in
turn requires better accounting and transpar-
ent record keeping by the companies. Hence
there was further pressure on adopting better
accounting methods.
Thus we hypothesize:
H4. Listing on stock exchanges increases SOEs’
use of Western management accounting/controls.
Government in?uence and enterprise size
Beyond privatisation and the opening of mar-
kets, China’s recent reforms also were aimed at
‘reducing government interference in enterprise
management.’ (Hassard et al., 1999, p. 70). Shlei-
fer and Vishny (1994, p. 1015) have argued that
the e?ective restructuring or modernization of
public enterprises largely depends on the extent to
which employment control rights are transferred
to management in the process of corporatization.
In China’s SOEs, government in?uence still exists
via the power of communist party o?cials to
intervene in enterprise decision-making, including
the appointing of SOE managers, cadres and
boards of directors (Hassard et al., 1999, pp. 75–
76). But such in?uence is not uniform, as ?rms in
di?erent industries and regions are subject to
idiosyncratic treatment by governmental policies
(Lin et al., 1998).
2
For example, SOEs in more
decentralized industries and coastal cities tend to
have greater freedom in human resource adminis-
tration. And even within the same industry or
region, not all SOEs have state representatives as
board members or asset-management supervisors.
In addition to constraining SOEs’ latitude for
change, government in?uence also can shift SOE
management’s attention away from e?ciency or
pro?tability. For example, the government may
emphasize providing employment over e?ciency
out of a concern for social stability. Both the hin-
drance and goal displacement from government
in?uence can reduce SOE managers’ intention to
sharpen managerial discretion, improve organi-
zational e?ciency, and adopt advanced enterprise
management systems (Branie, 1996; Peng &
Heath, 1996; Child, 1994; Groves et al., 1994).
For example, Goodall and Warner (1999) found
that government in?uence impeded the implemen-
tation of modern human resource management
practices. Based on the preceding discussion, we
hypothesize:
H5. SOEs’ use of Western management accounting/
controls decreases with their extent of being subject
to government in?uence.
Another characteristic of government in?uence is
that di?erent treatments are accorded large vs. small
SOEs (Lee, 2001; Goodall & Warner, 1999; Zhu,
2
It is possible that the di?erent treatments are the result of
the government rationally determining the level of in?uence
needed based on the level of liberalization forces faced by SOEs
across and within particular industries. Some (e.g. Chen, 2000)
have argued that in industries with less growth and employ-
ment opportunities, the government exercises greater in?uence
over human resources, thereby constraining the adoption of
more e?cient forms of enterprise.
354 N.G. O’Connor et al. / Accounting, Organizations and Society 29 (2004) 349–375
1999). Large SOEs help to bear a heavier share of the
burden from retirement pensions, other social-wel-
fare costs, and redundant workers (Lin et al., 1998,
p. 425; Goodall &Warner, 1999, pp. 33–34) and thus
have garnered preferential support during various
reform stages. For example, as part of expecting
large SOEs to alleviate the unemployment problem,
‘in 1996, the government supported a total of 300
large SOEs and ?fty-seven conglomerate groups. By
the end of 1998, it will have increased its support to
512 large SOEs and 120 conglomerates.’ (Chen,
1998, p. 29). In contrast, for small SOEs, the gov-
ernment has adopted a ‘‘let go’’ strategy. The head
of a World Bank Mission in China commented as
follows on the SOE reforms launched at the 15th
Party Congress in 1997: ‘(M)any of the smaller
enterprises are ending up as non-state operations
or cooperatives or are being taken over by the
managers or workers in some form which is close
to privatisation. . .Basically the government is say-
ing ‘‘We are going to let them go and it is the only
practical thing.’’ ’ (Seidlitz, 1998, p. 8). Since gov-
ernment support is likely to reduce both the
urgency and leeway for adopting more formal and
transparent management accounting/controls, we
hypothesize:
H6. SOEs’ use of Western management account-
ing/controls decreases with their size.
3
Chinese management norms and enterprise age
Yet another factor that can impede the adoption
of more formal (and presumably impartial) and
transparent processes and controls is Chinese
management norms. Such norms generally re?ects
a preference for well-established routines and
procedures (including an iron-rice bowl mentality
(security of employment)), formal centralized
bureaucracy, respect for status and seniority, and
a strong sense of egalitarianism (Baird et al., 1990;
Von Glinow & Teagarden, 1988; Davidson, 1987).
Attributes like these are antithetical to Western
management accounting/controls that: a) facilitate
information processing through the decentraliza-
tion of decision making, and b) deal with agency
costs through the use of more formal performance
evaluation routines. Chinese management
norms—speci?cally in respect to the prevalence of
coalitions between workers and supervisors, and
between managers and government representa-
tives—had been found to be a formidable barrier
in the adoption of past reforms (Cauley & Sand-
ler, 1992; Lee, 1990). Since practices require time
to arise and to become entrenched, they are likely
to be an obstacle to change in older SOEs. Hence,
we hypothesize:
H7. SOEs’ use of Western management account-
ing/controls decreases with the presence of
Chinese management norms.
H8. SOEs’ use of Western management account-
ing/controls decreases with their age.
Availability of training
At the organization level, an important in?u-
ence on management accounting/control practices
is the availability of training and organizational
participants’ capability to work within a more
formal and transparent environment. Training
facilitates the development of absorptive capa-
city—the capability to acquire, assimilate, and
exploit information regarding appropriate inno-
vation (Cohen & Levinthal, 1990). Since increased
use of Western management accounting/controls
implies greater responsibility and accountability
on the part of managers, it would require SOE
managers to have this absorptive capability. For
managers of Chinese SOEs, training can come
from multiple sources, including on-the-job learn-
ing, formal in-house training, and outside training
in local schools (Child & Markoczy, 1993; Yan &
Gray, 1994). It also can be conducted by organi-
zational members (e.g. senior managers) or exter-
nal parties (e.g. joint venture expatriates or
consultants). We hypothesize:
3
In contrast to H6, H5 predicts that government in?uence
will also vary across SOEs of similar size due to other govern-
ment purposes (e.g. industry and location). Thus it is possible
for H5 to be independent of H6.
N.G. O’Connor et al. / Accounting, Organizations and Society 29 (2004) 349–375 355
H9. SOEs’ use of Western management account-
ing/controls increases with the availability of
training.
Method
A two-stage data collection approach was used
to increase our ability to capture the phenomenon.
The ?rst stage consisted of in-depth interviews at
four SOEs and two of their joint venture partners.
These interviews served two purposes. First, they
provided insights into the SOEs’ management
accounting/control practices in their own right.
For this purpose, the advantage of the interview
approach was that it permitted following up on
‘‘how’’ and ‘‘why’’ questions (Yin, 1989) to ‘map
novel, dynamic, and/or complex phenomena
ignored or inadequately explained by existing the-
ories.’ (Keating, 1995, p. 69). The second purpose
was to inform the development of a survey instru-
ment, which was used to collect data from a larger
sample of SOEs for hypothesis testing. The design
and ?ndings of the interview study are discussed in
the remainder of this section.
Interview study
We limited our sample to manufacturing enter-
prises due to their importance in the current
Chinese economy, and to control for extraneous
variation (Eisenhardt, 1989) across industry sec-
tors. Firms were selected from two industries
likely to di?er on factors that could a?ect the
motivation to adopt more formal and transparent
management accounting/control systems (e.g.
market competition and technological dependence
on foreign investment). Also, the chosen entities
had to have existed for at least several years so that a
history of operating data would be available.
Visits were made in December 1997 to six
enterprises in Shanghai. Two each of these were
SOEs from the food and electronics industries.
One SOE from each industry was a JV partner
(JV-SOE) and one was a non-joint venturing SOE
(non-JV SOE). This mix was aimed at permitting
the e?ects of joint venturing to be manifest, as
engaging in joint ventures had been identi?ed by
Firth (1996) as a major di?usion driver. The two
remaining enterprises were JVs with which the
JV-SOEs were involved. They provided a base of
comparison for information gathered from their
SOE-JV partners. The selected enterprises and
interviewees were contacted through the university
network in Shanghai.
The visit to each enterprise involved in-depth,
one-on-one interviews with one senior and one
functional manager, making 12 interviews in total.
All interviews were conducted in Chinese with two
of the co-authors present, and took between two
to three hours per enterprise.
4
Interviewees were
sought from two management levels because the
controls applicable or applied to each may di?er.
Obtaining responses from more than one source
also facilitated triangulation of data.
A pre-determined interview protocol was fol-
lowed which included a combination of closed-
ended and open-ended questions. The interviews
were conducted in the same order.
5
The Appendix
presents the open-ended question protocol used
for the senior manager interviews. A similar pro-
tocol was used for interviewing the functional
managers. To ensure data accuracy, we conducted
numerous checks (Lincoln & Guba, 1985) by
which the original interviewees veri?ed our tran-
scribed scripts and our interpretations of their
responses.
Interview questionnaire
The structured part of the interview ques-
tionnaire contained questions about the manage-
4
Interest shown by the interviewees to our study and method
was evident on a number of accounts. Most managers com-
mented on the high relevance of questions across all areas. They
also reported that the nature of the interview data gathering
exercise was their ?rst experience. Their previous involvement had
been limited to completing surveys for studies conducted at a
distance. Consequently, most managers were quite forthcoming
with examples in follow-up to many of our questions.
5
We have to acknowledge the possibility that the interviewees
may have been sensitized to our research expectations (as re?ected
in the structured questions in sections one and two), and that this
may have created demand e?ects on their responses with respect
to the in?uences on changes during the 3-year period. Mitigating
this concern is our having asked about the level of environmental
and government in?uence in the second section before asking
about changes in the third and fourth sections.
356 N.G. O’Connor et al. / Accounting, Organizations and Society 29 (2004) 349–375
ment accounting/controls in use at two di?erent
points in time, as well as the forces, facilitators
and barriers associated with the change in these
uses.
6
The questionnaire (and sequence of the
interview) was divided into four sections: organi-
zational characteristics, environmental and gov-
ernment in?uences on the organization,
management accounting/control practices, and
other in?uences on change (forces, barriers and
facilitators). Each section contained items that
asked for responses on a 7-point Likert scale, fol-
lowed by open-ended questions. For each item,
responses were sought relating to the time of the
interview (December 1997) and three years pre-
vious (1995). Our expectation was that by con-
sidering the extent and sign of change across time,
the interviews would better elucidate the dynamics
of the change process, in turn enriching design of
the survey instrument. Choice of the 3-year time
span was based on extant ?ndings that such a time
window is needed to capture changes in organiza-
tional systems and practices (Chenhall, 1997;
Simons, 1987). There were 144 scaled-response
items in all.
7
The ?rst section on Organizational Character-
istics comprised six questions on the organization,
together with size (number of employees) (Firth,
1996), sales growth rate (Libby & Waterhouse,
1997), percentage of output exported (Firth,
1996), prior JV experience (Firth, 1996) and
organizational performance (Beamish, 1987). The
second section comprised environmental and
government in?uences on the organization. The
questions on Environmental In?uences (14 items)
were adapted from Gordon and Narayanan (1984)
and Chenhall and Morris (1986), with several
items added to re?ect the China environment. In
addition to the two points in time, the 14 items
were asked with respect to two sets of scales. The
?rst scale was the predictability of the environ-
ment (1=Highly unpredictable, and 7=Highly
predictable), and the second scale was the extent
of the environment’s impact on the survival or
success of the ?rm (1=Very low impact, and
7=Very high impact). The scale for Government
In?uence (5 items) was developed from the litera-
ture (e.g. Hassard et al., 1999), in conjunction with
the authors’ prior experience in case study visits to
both SOEs and joint ventures in China. The items
focused on the internal vs. external composition of
the board of directors, percentage shareholdings
by di?erent parties and the role of the government
representative. Answers were sought with respect
to how di?erent aspects of governance structure
(including% stock ownership by outside directors,
and the role of the government representative)
a?ected the decisions that the interviewee had
made for the part of the enterprise that they man-
age, using a seven-point Likert scale (1=No e?ect,
and 7=Great e?ect).
The third section probed management account-
ing/control practices with seven sets of measures.
The name of each set, along with the response
scale and sources from which it was developed,
are as follows: Formalization of Organizational
Structure: 14 items (1=Extremely informal—not
documented, to 7=Extremely formal—fully
documented) (Roth et al., 1991; Chenhall &
Morris, 1986). Decentralization: 14 items (1=No
delegation to you, to 7=Full delegation to you)
and four other items (1=Not used, to 7=Used to
great e?ect) (Brickley et al., 2000; Chow et al.,
1996; Gordon & Narayanan, 1984). TQC Proce-
dures: nine items (1=Not used, to 7=Used to
great e?ect), Financial Controls: 17 items (1=Not
used, to 7=Used to great e?ect) and Performance
Evaluation Style and Performance-based Incentives:
six items (1=Not used, to 7=Used to great e?ect)
were adapted from six sources—Firth (1996),
Chow et al. (1996), Shields and Young (1993),
Briers and Hirst (1990), Simons (1987), and
Khandwalla (1972). Integrating Mechanisms: 10
items (1=Not used, to 7=Used to great e?ect)
adapted from ?ve sources—Roth et al. (1991),
6
While the theoretical model and hypotheses in this study
uses the term ‘‘in?uence’’ to encompass several factors, these
factors are described as forces, facilitators and barriers to
change in the ?eld interview section to provide an orderly pre-
sentation of the ?ndings in as original detail as possible.
7
The instrument was ?rst developed in English. Then it was
translated into Chinese by one of the bi-lingual research team
members. The other bi-lingual research team member then
made changes and corrections to this translation. The instru-
ment was then evaluated by the ?rst bi-lingual team member in
discussion with the third research team member and ?nal
changes made. The English version of the questionnaire is
available from the ?rst author on request.
N.G. O’Connor et al. / Accounting, Organizations and Society 29 (2004) 349–375 357
Adler (1991), Bartlett and Ghoshal (1989), Pascale
(1985), Van Maanen and Schein (1979), and
Degree of Formal Controls: 12 items (1=Strongly
agree, to 7=Strongly disagree) based on Birnberg
and Snodgrass (1988). Interviewees also were
asked to provide a ratio that re?ected the mix of
formal/informal processes at their management
level and the immediate level below.
The fourth section contained open-ended ques-
tions on the purposes behind the use of manage-
ment accounting/controls and the forces, barriers,
and facilitators to change in such use. Both senior
and functional level managers were asked ques-
tions covering the accounting/control mechan-
isms. Questions on environmental in?uences,
corporate governance and performance were only
posed to the senior managers, as they are more
likely to be knowledgeable about such issues.
Table 1 shows that in all four SOEs, the use of
management accounting/controls had increased
between 1995 and 1997. This table also shows that
a broad range of management accounting/controls
was used by all four SOEs.
Content analysis
Content analysis (Yin, 1989) of the open-ended
responses involved one of the authors classifying
each cited event or action in terms of four cate-
gories—decisions a?ected by change in manage-
ment accounting/control use, forces, barriers and
facilitators of change. This analysis was performed
in April 1998. It was repeated six months later
(September, 1998) by another author. Comparing
the two sets of results led to reclassifying several
decisions a?ected by the change. Then, a total count
of citations was used to rank events or factors under
each of the four categories. Table 2 presents
examples of the forces, facilitators and barriers
taken from the content analysis. These data are
reported separately for each enterprise and within
each, the level (senior vs. functional management,
identi?ed as ‘‘S’’ and ‘‘F’’, respectively) of the
interviewee.
Purposes and level of use of management
accounting/controls
The reasons given by the interviewees for their
enterprises’ increased use of management
accounting/controls were generally consistent with
expectations: (1) To formalise the decision making
process. A senior manager (Food-JV-SOE) noted:
‘Pressure to increase sales and to decrease costs has
forced management to formalise the use of man-
agement teams to make decisions in the areas of
production quality, cost evaluation, sales and ?nan-
cial management.’ (2) To reduce manager decision
error. A functional manager (Food-JV-SOE)
noted: ‘With the dynamic market situation sub-unit
managers need more management standards to do a
good job.’ Another functional manager (Elec-JV-
SOE) put it this way: ‘The market has become more
complicated, so lower level managers need more
formal guidelines/procedures to follow. There is now
less time and margin for errors in decision making.’
(3) To increase the performance accountability of
managers below the top level. All enterprises in
the interview sample had experienced substantial
annual growth over the past three to ?ve years
(range: 15% to 40%), and more formal proce-
dures were seen as facilitating the evaluation of
lower level managers. One functional manager
(Food-SOE) put it this way, ‘Performance eval-
uation has become more formalised in order for
senior management to understand the higher and
lower performing functional-level managers.’ A
senior manager (Elec-JV-SOE) noted:
Increase in size (average revenue growth of
35% per year during the past ?ve years) has
caused a focus on the desire to minimize incor-
rect decisions and to increase the CEO’s repu-
tation. At the sub-unit manager level, greater
formalisation was needed to support greater
decentralization whereby functional managers
have greater control over the operation sit-
uation of the lowest managers.
The open-ended responses also provided speci?c
examples of decisions that had become more for-
malised across the SOEs (except Elec-SOE). These
related to sales and marketing procedures, human
resource management, budgeting, and operations
management. For both non-JV-SOEs (Elec-SOE
and Food-SOE), budgeting and cost control pro-
cedures were reported to have become more for-
malised. A senior level manager of Elec-SOE
358 N.G. O’Connor et al. / Accounting, Organizations and Society 29 (2004) 349–375
Table 1
Quantitative ?ndings from on-site interviews
a
Joint
venture
State-owned
enterprise partner
State-owned
enterprise
Joint venture
Food-JV
State-owned
enterprise partner
State-owned
enterprise
Elec-JV Elec-JV-SOE Elec-SOE Food-JV-SOE Food-SOE
Panel A: sign and percentage change in management accounting/control components—senior and functional manager responses
b
1. Formalization of organization structure 2% 39% 27% 16% 4% 35%
2. Decentralization 3% 10% 29% 22% 6% 13%
3. Approval and TQC procedures 2% 4% 13% 2% 10% 23%
4. Financial controls 1% 34% 9% 0% 0% 30%
5. Performance-based incentives 0% 25% 25% 0% 29% 14%
6. Performance evaluation style—rule-based 0% 8% 0% 32% 41% 51%
7. Performance evaluation style—relationship-based 2% À7% 0% À11% 18% À16%
8. Integrating mechanisms 0% À7% 23% 17% 35% 42%
9. Control system formality 2% 6% 29% 23% 33% 54%
Agreement between senior and functional managers
on sign of change
High High High High Moderate High
Panel B: mix of formal/informal controls (total=100)
Senior manager: 1995 1997 1995 1997 1995 1997 1995 1997 1995 1997 1995 1997
Senior manager level 90/10 65/35 20/80 40/60 70/30 90/10 70/30 90/10 80/20 90/10 70/30 90/10
Perception about functional manager level 50/50 70/30 70/30 80/20 60/40 90/10 70/30 90/10 50/50 70/30 70/30 80/20
Functional manager:
Functional manager level 40/60 60/40 40/60 70/30 40/60 60/40 45/55 65/35 30/70 40/60 60/40 80/20
Agreement between senior and functional managers
about the degree and sign of change
c
:
At functional manager level High High Moderate Moderate Moderate High
Towards more formal procedures High High Moderate Moderate Moderate High
a
Based on site visits to four state-owned enterprises (SOEs) and two joint ventures in December 1997.
b
% change was determined by dividing the di?erence between responses for 1997 and 1995 (3 years previous), by the 1995 response. All items were determined based
on the average of senior and functional manager respondents.
c
Example: for Elec-JV, 50/50 to 70/30 is rated as being highly similar to 40/60 to 60/40 in sign and extent of change.
N
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noted, ‘Formal procedures have been adopted for
the purchase of assets. For example, approvals are
now required for the purchase of equipment costing
more than 100,000 Renminbi.’ The extent of
change was seen as depending on the SOE’s start-
ing point, in part related to its JV experience. A
manager of Elec-JV-SOE observed, ‘The JV’s
adoption of such procedures was higher to begin
with due to the contractual arrangements with the
initial set up of the JV. In contrast, the SOEs are
evolving from a socialist state system of control to
a more market-based system, hence they have
experienced greater change towards the adoption of
management accounting controls.’ Finally, man-
agers from all four SOEs noted increased
communications about sales and human resource
problems.
In?uences on change
Most of the managers indicated that a major
motivator for change was increased market com-
petition and/or complexity, with six interviewees
explicitly citing this factor (see Table 2). A senior
manager (Food-SOE) observed: ‘Competition is
the main external force for change. This force is
also enhanced internally through the CEO putting
pressure on the senior managers to do better.’
Another senior manager (Elec-SOE) noted: ‘The
market situation has become more open: competi-
tive environment.’ Other major forces for change
Table 2
In?uences on management accounting/control change in SOEs: content analysis of on-site interviews
Examples of in?uences extracted from content analysis
a,b
ELEC FOOD Total
number of
JV-SOE SOE JV-SOE SOE times cited
Forces for change
1. Increased market competition and/or complexity S,F S S S,F 6
2. Increased market size, company sales and employee growth S,F F 3
3. Holding company pressure, concern for CEO reputation S S S 3
4. Government requests—to JV, mandated management system, tax and labour
regulations
S S 2
Facilitators of change
1. In-house training—on the job, from senior managers S,F S,F S S,F 7
2. Training in local schools F S S,F 4
3. Procedures transferred from the JV S,F S 3
4. Sending Chinese managers to the JV/overseas for training and development S,F S 3
5. Frequent communication from senior managers/informal meetings between
sta?
S F S 3
6. Training by government o?cials S S 2
Barriers to change
1. Lack of managerial ability by functional or lower level management S,F S,F S F 6
2. Threat to the Chinese (culture and philosophy) way of doing things—
Concern about loss of power, in?uence associated with having a good
relationship with immediate superiors/Reliance on traditional bureaucracy/
Loss of security of long term employment
F S,F S S,F 6
3. Outdated performance/reward system—no connection between performance
and rewards
F S,F 3
4. Insu?cient (or outdated) training, encouragement and/or government
support
S,F S 3
5. Government control over parts of organizational operations (e.g. labour
management and investment)
S,F S 3
6. Time requirement to learn and understand new techniques and procedures S F 2
a
Number of cites by four senior and four functional managers in four state-owned enterprises in two industries: electrical (ELEC) and
Food (n=8). Senior managers are identi?ed as ‘‘S’’ and functional managers as ‘‘F’’. Only factors cited by at least two SOEs are shown.
b
Only the SOE interviewee responses are shown. Details of the JV data can be obtained from the ?rst author on request. Dates refer to
beginning of 1995 and end of 1997.
360 N.G. O’Connor et al. / Accounting, Organizations and Society 29 (2004) 349–375
were seen as holding company in?uence, concern
for the CEO’s reputation, increased market size,
and company growth (both were cited three
times). Government in?uence in the form of man-
dated management systems, tax and labour reg-
ulations were each considered a force for change
by managers from two of the four entities.
Focusing on facilitators of change, seven inter-
viewees cited in-house training as being an impor-
tant factor. Training in local schools, and
technology transfers from the JV were cited by
four and three interviewees, respectively. Both
JV-SOEs in the interview sample had adopted the
approaches of their foreign JV partners in pro-
duction, marketing and selling. The functional
manager from JV-Elec-SOE said: ‘There are forces
from foreign joint venture partners to require the
company to follow their procedures.’ The senior
manager from Elec-JV-SOE observed: ‘The joint
venture provided necessary knowledge on how to
manage product channels and markets. . .(It) pro-
vided the channel for learning more formal (sophisti-
cated) purchasing and marketing management
practices.’ At the same time, the degree to which the
JV partner facilitated change was seen as being
dependent on the Chinese JV partner (holding com-
pany). While Elec-JV-SOE obtained training from
the Elec-JV, Food-JV-SOE did not reap the same
bene?t from its joint venture. The Food-JV-SOE’s
holding company did provide a source of training,
but its limited participation in the Food-JV (only
interested in the pro?ts) led to little knowledge being
transferred to Food-JV-SOE from the Food-JV.
The interviews also shed light on the nature of
various barriers. In citing lack of managerial ability
as a barrier, a functional manager fromElec-JV-SOE
put it this way: ‘It is time consuming to get managers
up to speed with market developments and organiza-
tion changes.’ A senior manager from Elec-SOE
shed further light on the nature of this barrier:
‘Managers’ personal ideas about the business often
were in con?ict with the new environment they wanted
to create, especially with older managers.’ The com-
ment of a functional manager from Elec-JV further
suggested that some barriers and facilitators may be
connected: ‘Traditional Chinese concepts held by
management pose a barrier to new management tech-
niques, therefore more training is required.’
Comments also were made about a personal
sense of insecurity from change, revealing that some
of the barriers might be connected. A functional
manager from Elec-JV-SOE stated: ‘The change
usually brought a signal of reduced demand of
labour to workers.’ Along the same vein, a senior
manager (Food-SOE) shared this experience: ‘The
employees did not accept change because they felt
that they would stay in the company permanently.
Making no change would be better. They felt that
any change is associated with a change of employ-
ment terms within the company.’ In most cases
(except Food-JV-SOE), the perceived threat to
personal security was seen as the result of chal-
lenges to the Chinese management norms held by
managers. These especially related to the sense of
personal relationships (for rewards and promo-
tion) and a sense of position and authority based on
seniority (age) and term with the ?rm. As a senior
manager (Food-SOE) put it: ‘Older management has
gained signi?cant personal power through the old
hierarchical system of bureaucracy based on personal
relationships. Therefore they have been slow to accept
the use of more formal procedures required to e?ec-
tively compete in the marketplace.’ In turn, this
reluctance to change may have contributed to
employees’ lack of trust in senior management.
Relating to external intervention, a senior man-
ager of Food-JV-SOE noted: ‘The senior managers
want to learn new ways of increasing competitive-
ness but are constrained by what the government
wants to teach them through the holding company.
The government still uses its own ideas to manage
both the holding company and its subsidiaries. The
government has not changed the management of the
holding company, nor has it changed the content of
training provided.’ Another senior manager (Food-
JV-SOE) put it this way: ‘The management (of
Food-JV-SOE) has no decision rights in the areas
of human resources, investments and asset sales.
The lack of rights in the de-employment of labour
has been a major barrier to decreasing their costs.
For example, they would like to decrease their
employment headcount by 20% but have been pre-
vented from doing so by the holding company.’
Taken as a whole, the interview ?ndings con-
?rmed many of our expectations about the level of,
and in?uences on Chinese SOEs’ use of Western
N.G. O’Connor et al. / Accounting, Organizations and Society 29 (2004) 349–375 361
management accounting/controls. They also yiel-
ded useful insights into the avenues whereby
impacts arise. As we explain in the next section,
these insights were incorporated into the survey
used to collect data for hypothesis testing.
Survey
Survey instrument
The survey instrument was based on the closed-
ended items in the interview questionnaire, with
modi?cations to re?ect the interview ?ndings. The
instrument had three parts—organizational
characteristics, management accounting/control
mechanisms, and in?uences on change.
For management accounting/control mechan-
isms (see Table 3) several changes were made
based on the interview ?ndings. For example,
decentralization (18 items in the interview instru-
ment) was reduced to four items associated with
approval procedures that were perceived by the
interviewees to have changed the most during the
period studied. Both degree of control system
formality and formal/informal process mix were
removed because their content is substantially
covered by the retained items. Questions on the
purposes of the management accounting/controls
also were dropped. This was due, in part, to con-
cern for the length of the survey.
8
Furthermore,
we had not pro?ered hypotheses about such pur-
poses. Instead, the e?ects or bene?ts of the man-
agement accounting/controls were assumed, and
the interview ?ndings had quite clearly supported
the validity of these assumptions.
For organizational characteristics and in?uences
on change, feedback from the interviews led to
items being added to those listed in the interview
instrument. Speci?cally, six items were inserted on
the nature of employment contracts, two relating
to exchange listing, and two on government in?u-
ence. For example, % of employees on limited-term
employment contracts comprised two items/groups
(managers and non-managers) and required the
respondents to indicate on a 5 point scale (100, 75,
50, 25, 0%) the percentage of each group that are
on contract basis. Interview feedback also led us
to modify the measures of in?uences of change.
For example, we modi?ed the measure of inte-
grating mechanisms (informal controls) and com-
bined it with the items used to measure the
availability of training (see Table 4). This was in
response to the interview ?nding that integrating
mechanisms were used to facilitate the adoption of
management accounting/controls, rather than
being used as controls themselves. In similar fashion,
the list of 14 environmental in?uences was merged
with forces for change to remove redundancy that
existed in the interview instrument. Several items
comprising in?uences on change (including Govern-
ment In?uence) are shown in Table 4.
Finally, to reduce the threat of common
response (Young, 2000), we used response scales
for several independent variables (e.g. market
competition, joint venture experience, stock
exchange listing, size and age) that were di?erent
from the dependent variable. Also, the scale for
government in?uence was in the same direction
(1=No e?ect, and 7=Great e?ect) as the scale for
‘‘Western’’ management accounting/controls, thus
reducing the chance that common response bias
would allow us to accept hypothesis 5.
Survey sample
SOEs to be surveyed were identi?ed based on
information from the Ministry of Foreign Eco-
nomic Relations and Trade. As with the inter-
views, we sought industries likely to yield a spread
on the factors implicated in the hypotheses. The
sample was selected from ?ve industries: retail,
electronics, textiles, plastics, and building materi-
als. Government protected and closely controlled
industries, such as telecommunications and
mining, were excluded to avoid adding unneces-
sary noise to the data.
The survey was sent in 1999 to one senior and
one functional level manager in each of 82 SOEs
(sample population). The plan was to use the two
responses from each SOE as a validation check on
8
The concern with survey length was a response to the
interviewed managers’ shared admonition (and our personal
experience) that the survey instrument had to be kept short to
have a reasonable chance of being completed.
362 N.G. O’Connor et al. / Accounting, Organizations and Society 29 (2004) 349–375
each other. Forty-seven SOEs returned only one
completed response each, despite repeated follow
up communications. Thirty of these 47 responses
were from functional managers. In conjunction
with the two responses each from the remaining 35
SOEs, there were a total of 117 respondents, 65 of
which were functional managers (representing a
functional manager response rate of 79.27%). All
respondents indicated that they had been at the
SOE for at least several years.
Table 3
Factor analysis of management accounting/controls
Factor 1 Factor 2 Factor 3 Factor 4 Factor 5
1996 1999 1996 1999 1996 1999 1996 1999 1996 1999
To what extent has your company established formal and written procedures/guidelines that employees must follow relating to the
following items?
a
Formal Procedures (8 items)
Development of new products or services 0.489 0.586
Hiring and ?ring of managerial personnel 0.679 0.696
Allocating the budget among alternate uses 0.620 0.526
Pricing decisions 0.563 0.740
From which sources to obtain inputs 0.749 0.774
Scheduling of production operations 0.669 0.837
Distribution of products/outputs 0.726 0.466
Manager performance evaluation processes 0.605 0.408
To what extent has each of the following management procedures and processes been used in your company?
b
Approval procedures (4 items)
Hiring new employees (e.g. headcounts) 0.608 0.492
Spending discretionary programme money 0.800 0.820
Making capital expenditures 0.820 0.840
Formal sector-level committee meetings 0.867 0.787
Total quality control procedures (6 items)
Total quality control circles 0.767 0.780
Statistical quality control of production 0.786 0.808
Materials requirement planning procedures 0.687 0.525
Internal auditing procedures 0.438 0.545
Performance or operational auditing 0.642 0.580
Standard costs and variance analysis 0.549 0.468
Budget targets (5 items)
Use of budgeting for:
(a) Cash/working capital 0.742 0.715
(b) Sales or Pro?ts 0.825 0.734
(c) Production 0.773 0.671
Annual or quarterly income/cost targets 0.679 0.699
Monthly income/cost targets 0.446 0.618
Performance targets (4 items)
Use of budget goals for the purposes of:
(a) Selecting employees for promotion 0.518 0.779
(b) Determining employees’ bonus pay 0.751 0.569
(c) Selecting employees for recognition 0.634 0.743
Merit-based compensation contracts 0.521 0.658
Eigenvalues 2.561 10.073 1.686 2.656 10.527 1.516 1.769 1.825 1.343 1.383
a
1=Extremely informal—not documented, 4=moderate formality, 7=extremely formal—fully documented.
b
0=N/A or not used, 1=no e?ect or used to no e?ect, 4=some e?ect or used to some e?ect, 7=great e?ect or used to great e?ect.
N.G. O’Connor et al. / Accounting, Organizations and Society 29 (2004) 349–375 363
We ran an independent samples t-test of means
between the two respondents from each SOE (for
the 35 SOEs with two respondents) across all
items, and found non-signi?cant (P>0.05) di?er-
ences in all but one item (formalization of pricing
decisions). The hypothesis test results were quali-
tatively identical between using the average of the
two responses for these 35 SOEs and the single
responses from the other 47 SOEs, and using only
the functional level manager responses. For sim-
plicity, only the latter results are presented below.
Table 5 presents summary demographic data on
the survey sample. On average, the SOEs had 3014
employees, with 68.75% of managers and non-
managers being on contract terms that averaged
5.31 years in duration. Forty-four (53.66%) of the
SOEs were currently listed on a stock exchange
with an average listing history of about four
years.
9
Forty-eight (58.54%) SOEs had JV
experience. During the 1990 reforms, larger
SOEs were more likely to be selected for listing
or participating in a joint venture (Chen, 1998).
Hence, we tested whether there was a size dif-
ference between listed and non-listed SOEs and
JV and non-JV SOEs. No signi?cant di?erences
were found. The average size of JV SOEs was
2682 employees, as compared to 3483 for non-
JV SOEs. The average size of listed SOEs was
3323 employees, as compared to 2657 for non-
listed SOEs.
The level of and in?uences on use of management
accounting/controls
Factor analysis using the varimax rotation yiel-
ded ?ve distinct management accounting/control
mechanism groupings (formal procedures,
approval procedures, total quality control, budget
targets, and performance targets, see Table 3), and
Table 4
Factor analysis of in?uences on the use of management accounting/controls
Factor 1 Factor 2 Factor 3 Factor 4
Government In?uence (2 items)
Government ministry representative on the board of directors 0.80
Activities of government representative in your ?rm 0.90
Market Competition (5 items)
Increased competition from foreign (overseas) enterprises 0.78
Increased competition from domestic enterprises 0.72
Increased market size 0.73
Company growth in sales 0.78
Desire to achieve ISO9000 or similar quality certi?cation 0.61
Availability of Training (5 items)
In-house or on-the-job training by Chinese managers 0.73
Training provided in local schools 0.79
Training provided by government o?cials 0.62
Frequent communication, informal meetings with senior managers 0.75
Sending Chinese managers overseas for training and development 0.55
Chinese Management Norms (3 items)
Employees’ personal concern for security of employment 0.71
Employees’ lack of trust in the senior management 0.75
Employees’ concern for loss of power and in?uence associated with
having a good relationship with immediate superiors
0.74
Eigenvalues 1.178 1.471 3.481 2.175
9
Four of the SOEs had only been listed during 1998 or
1999. Analyses were run with and without these particular
SOEs and the results for employment contract term and stock
exchange listing were unchanged.
364 N.G. O’Connor et al. / Accounting, Organizations and Society 29 (2004) 349–375
four in?uences (government in?uence, market
competition, availability of training, and Chinese
management norms, see Table 4).
10
All of these
aggregate measures had acceptable reliability, as
indicated by Cronbach alphas above 0.60, the
generally accepted range of construct reliability
(Carmines & Zeller, 1979).
Table 5, Panel B shows that all of the manage-
ment accounting/controls had moved towards
greater formalisation and explicitness between
1996 and 1999.
11
Since our hypotheses had
focused on levels, attribution of di?erences in
1999 must recognize that the SOEs in the sample
probably di?ered on the focal characteristics at
the beginning of our study period (i.e. 1996), and
these characteristics could have a?ected their use
Table 5
Summary statistics: in?uences on, and use of management accounting/controls
Alpha Mean S.D. Min. Max.
Panel A—in?uences on change
% on limited-term employment contract—
managers and non-managers
68.75% 30.89% 0.00% 100.00%
Market Competition 0.67 23.75 5.31 5.00 35.00
Joint Venture Experience? 0=No, 1=Yes 58.54% 49.57% 0.00% 100.00%
Stock Exchange Listing? 0=No, 1=Yes 53.66% 50.02% 0.00% 100.00%
Government In?uence 6.34 3.59 0.00 14.00
Enterprise Size– Full time equivalent employees 3014.37 4131.76 100.00 32250.00
Chinese Management Norms 0.66 12.21 3.65 3.00 19.00
Enterprise Age (years) 19.91 19.10 3.00 97.00
Availability of Training 0.75 17.75 6.06 5.00 29.00
Alpha 1999 (1996) Mean S.D. Min. Max.
Panel B—management accounting/control (MAC) use—1999 (1996)
Formal procedures 0.89 (0.89) 39.49 (31.70) 7.55 (7.51) 17 (15) 56 (56)
Approval procedures 0.87 (0.88) 21.14 (17.21) 5.39 (6.26) 1 (1) 28 (28)
Total quality control procedures 0.82 (0.87) 27.25 (21.49) 7.71 (8.86) 3 (0) 40 (39)
Budget targets 0.84 (0.89) 24.43 (19.57) 6.37 (7.26) 0 (0) 35 (35)
Performance targets 0.76 (0.74) 15.67 (12.55) 6.05 (5.47) 0 (0) 28 (28)
Aggregate level of use of MACs (27 items) 0.92 127.98 (102.52) 25.23 (27.62) 37.00 (27.00) 172.00 (172.00)
Number of ?rms with
0 or (À) change
Mean S.D. Min. Max.
Panel C—sign of change in management accounting/control use—1996–1999
a
Formal procedures 27 3.94 3.81 À6.00 8.00
Approval procedures 26 1.80 2.05 À4.00 4.00
Total quality control procedures 26 2.78 2.86 À6.00 6.00
Budget targets 23 2.51 2.50 À5.00 5.00
Performance targets 37 1.63 2.09 À4.00 4.00
Aggregate sign of MACs change (27 items, Alpha=0.95) 18 12.67 11.88 À25.00 27.00
a
The sign of the di?erence between 1996 and 1999 responses for each management accounting/control practice (À1, 0 or 1) is summed for an additive
sign score for each control and for the overall MACs change.
10
As noted earlier, our interviews also indicated that man-
ager ability was a possible in?uence on the adoption of man-
agement accounting/controls. However, our survey responses
did not distinguish this measure from training. First, the factor
analysis resulted in the reward system being agglomerated with
manager ability, such that we do not have a pure measure of the
ability construct. Second, a strong positive correlation (P