The Transformation of China: Effects of the Institutional Environment on Business Actions

China has undergone a dramatic economic transformation since the early 1980s, as the centrally planned economy has been changed to a market-based economy through marketization, liberalization and privatization. In order to maintain the economic development, institutional evolution has also become a major focus of the Chinese government in the past twenty years. The institutional transitions in political and regulatory systems, legal frameworks, and market structures are intended to help Chinese firms (especially private firms and entrepreneurial firms) as well as foreign firms to operate in a more supportive institutional environment. This commentary examines two important characteristics of Chinese institutional evolution. First, the rule of law in China remains in an early stage of development with inconsistent enforcement. Second, because of the institutional transition in China, formal institutions including the legal, regulatory and political systems remain weak, and thus informal institutions still play a complementary role in regulating firm behaviors. We explore how the changing institutional environment and its characteristics affect local and foreign firms' behaviors.