Always nice when academics supply proof for prior suspicion. In this case the ‘superiority’ of Southern China based firms versus Northern China peers.
As a rough guide I’ve always drawn a line along the Yangtze to demarcate North from South in China. The researchers in the paper highlighted today have taken their line from the Hua River to the Qinling Mountain, a divide used in the past by Chinese administrators and a more historically significant separation [Qinling-Huaihe Line].
Writing in a CESifo (a global research network coordinated from Munich) Working Paper, S.K. Yong, Partha Sen and Cao Jing begin by pointing out there’s no doubt that a North-South divide exists, as the panel below from the paper shows; but why should this be so? That’s the real question.
The first place to look for explanatory variables is in the businesses themselves. Many Southern firms are exposed to global competition and international best practice being either part of or close to the export manufacturing complex. Northern firms by contrast tend to be more domestic-economy focused and many more are SOEs.
So far, so predictable. However, as the researchers tried to even out these operational advantages and handicaps something more interesting appeared. Even after adjusting for externalities there remained a significant gap in terms of management quality between Northern and Southern firms which couldn’t be explained by respective circumstance.
There is, to put it bluntly, a competence gap. The researchers skirt around the ‘why’ of this noting only that given it’s there a lot could be done to tune up firms in the north by addressing the manifest weakness.
For investors the implication is clear. Any due diligence of investable prospects in China should pay particular attention to management ability if the firm under consideration is based in the North.
You can access the paper in full via the following link An Inquiry into the North-South Management Gap in China.
Happy Sunday.