We’re from the government and we’re here to help!

Can government come to the rescue of fast-growing enterprises in surging economic markets like China?

In today’s high growth economies globally – China being a relative case in point – small-to-medium sized enterprises (SMEs) are confronted with a myriad of business opportunities. At the same time, they must deal with institutions and a legacy of government involvement in their domestic environments.

To this end, managers there must adopt an entrepreneurial mindset and take on what is known as an “ambidextrous” orientation. That is, they must be willing to take on both exploration (short-term) and exploitation (long-term) type opportunities.

Within this context, new research from SFU’s Beedie School of Business, authored by professor Eric Gedajlovic with colleagues Qing Cao (University of Connecticut) and Hongping Zhang (Shandong University), examines the case of Chinese high-tech SMEs and the role that government plays.

Their paper, “Corporate Shareholdings and Organizational Ambidexterity in High-Tech SMEs: Evidence from a Transititional Economy” was published in the Journal of Business Venturing earlier this year.

It reveals that entrepreneurs and managers might want to think twice before readily accepting offers of government investment in their companies.

In economies around the world, high-tech SMEs are viewed as generators of economic growth and jobs for their host nations.

According to Gedajlovic and his colleagues, these are the sorts of firms that have already played an important role in the transition of the Chinese economy from one largely reliant on state-run organizations, to one based on private sector firms.

Looking forward, argues Gedajlovic, they will likely play an increasingly pivotal role in China as their business and government leaders strive to convert their nation’s competitive advantage from one that relies upon cheap labour and government directed heavy industry to one based on entrepreneurship and innovation.

The paper develops a framework distinguishing between these firms’ short- and long-term opportunities – accounting for the possibility that managers of such firms may attend to one, both or neither.

And it explores the role of government investment versus managerial share ownership in these organizations.

The researchers’ results suggest that the widespread practice in many transitional nations of having governments acquiring equity stakes in private sector SMEs is a double-edged sword.

“This is about the role that government plays in China fuelling entrepreneurial growth – but the costs also involved in undermining that growth,” said Gedajlovic.

So, what’s a Chinese SME to think when they get a knock on the door with the announcement that “We’re from the government and are here to help”?

“When government gets involved, it distorts the incentives in such a way that firms select opportunities that don’t make sense,” says Gedajlovic.

The results of his research indicate a negative relationship between government shareholdings and the adoption by executives of exploitative and/or explorative strategic orientations.

“While government share ownership in private sector SMEs may have the effect of insulating a firm from market pressures to focus their activities, it also appears to have implications regarding managerial incentives and decision-making quality, which result in a net negative effect on the likelihood that executives will perceive and act upon both exploitative and explorative opportunities.”

On the flipside, the researchers maintain that managerial share ownership is associated with a high level of commitment to effort-intensive decision comprehensiveness as well as ambidextrous strategic orientation. In other words, a balance of long and short terms needs is one of the outcomes of providing ownership incentives to managers in transitional economies.

Ultimately, the researchers argue that on the basis of their evidence, “entrepreneurs in transitional economies should exercise considerable caution with respect to equity infusions from government agencies.”