Research on the Performance of the State-owned Forestry Industry Enterprise Based on the Principal-Agent Theory

Thesis PHD
1 January 2006

Since the establishment of the People’s Republic of China, the state-owned forestry industry (SOFI) has contributed greatly to national construction and social development. However, since the end of the 1970s the SOFI has been affected by the “two crises” [poor economic performance and ecological degradation], and these to date have yet to be resolved.

Using the breathing space temporarily afforded by the Natural Forest Protection Project (NFPP), and with the “two crises” as a starting point, the effectiveness of the choices and outcomes of the SOFI can be reduced to two aspects: the status of the SOFI’s protection of state-owned forest resources and the state of its economic development. From these two aspects, in-depth research of the principal-agent relationship between the SOFI and upper level forestry management departments, and identification of the factors influencing the efficiency of the SOFI’s economic behavior, are urgently needed for the establishment of an effective and sustainable system for organizing and providing useful policy recommendations for the state-owned forestry industry. This research hopes to 1) provide insights into how the SOFI can best adjust its business strategy, 2) help to enrich and develop the theories and methods used to research the issues affecting the SOFI, and 3) promote acceleration of the restructuring of the state-owned forestry industry. The findings and conclusions of this research are as follows:

Quantitative socioeconomic and forest-resource modeling analysis has found that 1) the short contract length of forest bureau managers in comparison to rotation periods is detrimental to forest resource protection, 2) the fee burden placed upon the forestry industry by upper level government (revenue share agreements) is quickening the over-harvesting of forest resources, 3) further deepening of tax system reforms is needed, 4) the significant social burden shouldered by state forestry bureaus is still a key issue, 5) the NFPP has in reality accelerated the recovery and development of forest resources, 6) the annual salary system for executives of lower-level cost accounting units is relatively reasonable within current institutional arrangements, and 7) the policy – within the institutional reforms in the state-owned forest area processing industry – of broadening avenues of employment via encouraging the development of the husbandry, aquaculture, non-timber forest product collection and agricultural sectors is accelerating economic development and raising the living standards of forest-farm households within forest areas, and thus helping to achieve the goal of forest resource protection.

Based on the results of the theoretical and applied research of this dissertation, the current contract arrangement between the state-owned forestry industry and upper-level management departments is non-optimal. Taking into account the difficulties of adjusting the contract period, only by changing the principal-agent relationship between the SOFI and upper-level management bureaus will a thorough change in contract details be possible. Through institutional restructuring, the state-owned forestry industry will be able to transform itself from its original mixed public-private organizational structure to a purely governmental body. By ceasing management of most state-owned forests by upper-level management bureaus, and by focusing on aspects of national public goods provision such as scientific research, extension and demonstration, it will be possible to dramatically develop the state forestry industry.

Further research of the costs and efficiency of the principal-agent relationship between the state-owned forestry industry and upper-level management bureaus is needed in order to produce more detailed and focused recommendations for reforms.

Publication | 14 June 2006