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Applied Economics Letters

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Efficiency of Chinese enterprises: Does human

resource management matter?
a b
Ying Chu Ng & Li-Qun Wei
a
Department of Economics , Hong Kong Baptist University, Kowloon Tong , Kowloon, Hong
Kong, PR China
b
Department of Management , Hong Kong Baptist University, Kowloon Tong , Kowloon, Hong
Kong, PR China
Published online: 13 May 2011.

To cite this article: Ying Chu Ng & Li-Qun Wei (2012) Efficiency of Chinese enterprises: Does human resource management
matter?, Applied Economics Letters, 19:1, 35-39, DOI: 10.1080/13504851.2011.566170

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 Applied Economics Letters, 2012, 19, 35–39

Efficiency of Chinese enterprises:

Does human resource management
matter?
Ying Chu Nga,* and Li-Qun Weib
a
Department of Economics, Hong Kong Baptist University, Kowloon Tong,
Kowloon, Hong Kong, PR China
b
Department of Management, Hong Kong Baptist University, Kowloon Tong,
Kowloon, Hong Kong, PR China
Downloaded by [University of Illinois Chicago] at 10:38 28 November 2014

Data Envelopment Analysis (DEA) was applied to Chinese enterprises with

different forms of ownership to estimate their efficiency. The efficiency scores
obtained were further regressed against scores rating the implementation of
Strategic Human Resource Management (SHRM) and other explanatory
data. State-Owned Enterprises (SOEs) were the least efficient, whereas
foreign-owned firms were the most efficient. Tentative evidence was found
of a relationship between SHRM practices and enterprise efficiency, but only
in foreign- and collectively owned enterprises, indicating that Chinese
enterprises lack management skills or/and are still subject to tight
institutional constraints than their foreign-invested counterparts.
Keywords: firm efficiency; strategic HRM; DEA; China
JEL Classification: M50; D20; L10

I. Introduction enterprises are efficient in their production. Efficiency

Over the past decades, economists have been keen to
evaluate the series of industrial and enterprise reforms
in China. Institutional factors associated with the
reforms are commonly cited as important determi-
nants in differentiating enterprise performance by
ownership (Zheng et al., 1998; Zhang et al., 2001).
However, not much emphasis has been placed on the
internal aspects of the enterprises in efforts to under-
stand their performance. This study sets out to adopt
appropriate techniques and measures from both eco-
nomics and human resource management theory to fill
this gap, examining the role of Strategic Human
Resource Management (SHRM) in the performance
of Chinese enterprises.
Good performance such as high productivity
growth or high accounting profit does not imply that
in production is an important indicator for measuring
firm performance in a fast-changing environment such
as the Chinese economy. Zheng et al. (1998) and
Zhang et al. (2001, 2002) found that State-Owned
Enterprises (SOEs) were the least efficient. The study
by Mok et al. (2007) analysed 238 foreign-invested
firms and reported that their average technical effi-
ciency was 54%.
The resource-based view of the firm suggests that
managerial competence is crucial to enterprise perfor-
mance and competitiveness (Barney and Wright,
1998). It is argued that firm performance can be
enhanced if the firm can implement a set of internal
consistent and strategy-aligned human resource man-
agement practices (Youndt et al., 1996; Purcell, 1999).
This is what the so-called strategic human resource
management is. Examples of empirical tests of the

*Corresponding author. E-mail: ycng@hkbu.edu.hk

Applied Economics Letters ISSN 1350–4851 print/ISSN 1466–4291 online # 2012 Taylor & Francis 35
http://www.informaworld.com
DOI: 10.1080/13504851.2011.566170
 36
relationship between SHRM and firm performance
can be found in Huselid (1995) and Snell and Dean
(1992). Recent studies in China also support the exis-
tence of a relationship between SHRM and enterprise
performance (Bjorkman and Fan, 2002; Law et al.,
2003; Wei et al., 2008).
Drawing on insights from both economics and
SHRM, this study was designed to test the impact of
SHRM on the efficiency of enterprises with different
ownerships using a two-stage Data Envelopment
Analysis (DEA) approach. The efficiency scores
obtained from DEA were regressed against a SHRM
measure and other economic data. This empirical
approach aimed at providing an explanation of enter-
prise efficiency not previously treated in the economics
literature.
Downloaded by [University of Illinois Chicago] at 10:38 28 November 2014
II. Methodology and Data
In addressing the efficiency of enterprises, this study
employed the method of DEA that is commonly found
in the efficiency literature. Consider j enterprises use N,
inputs to produce M outputs. Let Uj = (u1j, u2j, . . ., uMj)
and Xj = (x1j, x2j, . . ., xNj) be the observed output
and input vectors, respectively, of the jth enterprise in a
sample of J enterprises. The overall Farrell input-
oriented Technical Measure (TE) can be computed
using a typical nonparametric frontier:
TEj ¼ min l
X degree of SHRM implementation in the enterprise’s
subject to zi umi  umj ðm ¼ 1; . . . ; MÞ
X
i was 4 or above,2 the dummy variable for SHRM
zi xni  lj xnj ðn ¼ 1; . . . ; NÞ ð1Þ
X
i coded as 0. After excluding cases with incomplete infor-
zi ¼ 1
i analysis. Among the 388 enterprises, 65 were Foreign-
where 0 , l and z , 1. The technology behind this
problem exhibits Variable Returns to Scale (VRS). If
the last constraint stated in Equation 1 is removed,
Constant Returns to Scale (CRS) can be assumed in
the DEA. Any differences in the efficiencies estimated
assuming VRS and CRS then imply scale inefficien-
cies. Formally, scale efficiency is calculated as the
ratio of the CRS (overall) technical efficiency score
to the VRS (pure) technical efficiency score.
For input-based approach, the estimated efficiency
scores have an upper bound of 1. Accordingly, a Tobit
model is appropriate for estimating the determinants
1
Adopting one single-item scale can also be found in Zhu et al. (2005).
2
The full sample mean score of the SHRM scale is 3.2.
Y. C. Ng and L.-Q. Wei
of enterprise efficiency (Zhang et al., 2001; Wen et al.,
2002; Mok et al., 2007). The dependent variable was
the overall (CRS) technical efficiency score estimated
from the DEA as outlined above. The independent
variables included an enterprise’s size, industrial sec-
tor, degree of export orientation, national market
share, geographical location and degree of SHRM
implementation. All the analyses were done by enter-
prise type.
The data were drawn from a survey of enterprises
located in the cities of Beijing, Shanghai, Guangzhou
and Chengdu in 2003 and 2004. The survey was con-
ducted as part of a research project on business culture
and human resource management organized by a team
of scholars from several major universities in Beijing
and Hong Kong. Enterprises were randomly selected
from all those registered with the local government.
Information on each firm’s sales (the output measure
in this study), the value of its fixed assets and its number
of employees (the two inputs), together with back-
ground information on the enterprise, were provided.
The sector of industry (manufacturing or not), the
national market share of the enterprise and the enter-
prise’s exports (measuring its export orientation) were
surveyed using a questionnaire. Based on the number
of employees, enterprises are classified into three
groups: small-sized enterprises employing less than
500 employees, medium-sized enterprises with employ-
ees of 500–1000, large-sized enterprises of employees
over 1000 (the reference group). For the location vari-
ables, enterprises located in Chengdu are classified as
the omitted group. The firms were asked to evaluate the
general operations on a 5-point scale.1 If the score
implementation was coded as 1; otherwise it was
mation, a sample of 388 enterprises were used in the
Invested Enterprises (FIESs), whereas there were
slightly over 100 enterprises in each of the other three
types (Collective Enterprises (COEs), SOEs and Private
Enterprises (POEs)).
III. Empirical Results
Analyses of the raw data indicated that FIEs and
COEs outperformed the other two types of enterprises
in terms of total sales (see Table 1), which is consistent
with most prior research results. The distribution by
scale of enterprise was quite similar for the SOEs and
 Strategic HRM and firm efficiency in China 37
Table 1. Sample statistics

State-owned enterprises Collective enterprises Private enterprise Foreign-invested enterprises

Total sales (10 000¥) 18848.87 40695.47 10239.55 58061.32

(52406.73) (84525.77) (32706.48) (177788.04)
Number of employees 927.94 1074.18 407.31 678.08
(2247.42) (1477.98) (559.30) (1073.84)
Total assets (10 000¥) 35895.38 68838.94 8596.26 44722.39
(115643.96) (155739.05) (19760.95) (94461.06)
Enterprise type
Small 0.63 0.55 0.80 0.66
(0.48) (0.50) (0.40) (0.48)
Medium 0.23 0.14 0.13 0.18
(0.42) (0.35) (0.34) (0.39)
Large 0.14 0.31 0.07 0.15
(0.35) (0.47) (0.25) (0.36)
Production for export (%) 5.77 10.31 18.54 19.38
(17.39) (23.84) (33.80) (33.81)
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Market share in China (%) 6.33 8.07 6.43 5.85

(16.25) (15.35) (15.21) (10.14)
Manufacturing industry 0.63 0.79 0.88 0.75
(0.48) (0.41) (0.33) (0.43)
Location
Beijing 0.29 0.31 0.28 0.23
(0.46) (0.47) (0.45) (0.42)
Shanghai 0.30 0.17 0.23 0.29
(0.46) (0.37) (0.42) (0.46)
Guangzhou 0.23 0.19 0.22 0.14
(0.42) (0.40) (0.41) (0.35)
Sichuan 0.18 0.32 0.28 0.34
(0.39) (0.47) (0.45) (0.48)
Implementing SHRM (%) 0.91 7.41 6.67 12.31
(9.53) (26.31) (25.06) (33.11)
Sample size 110 108 105 65

Notes: SDs are in parentheses. SHRM, strategic human resource management.

FIEs. Geographically, there was no statistical differ-
ence in the distribution of various types of enterprises
in Beijing and Guangzhou. No less than 60% of the
sampled enterprises were engaged in manufacturing.
The percentage of production for export was much
higher in the POEs and FIEs, nearly 20%. There is no
statistically significant difference in national market
share by enterprise type. In line with the findings of
previous studies, the implementation of SHRM was
much more common in FIEs, about 12%.
Table 2 presents the geometric means of the overall
technical efficiency, scale efficiency and pure technical
efficiency by group. In general, the sampled enterprises
were quite inefficient in using their inputs to produce
their current level of output, with no more than 30% of
the existing inputs having required to produce the exist-
ing amount of output if the enterprises were technically
efficient. Among the four types of enterprises, FIEs
were found to be the least inefficient, followed by
COEs. Consistent with previous efficiency studies of
enterprises in China, SOEs were among the least effi-
cient enterprises on average.
The inefficiency, regardless of enterprise type, was
mainly attributable to pure technical inefficiency.
Notable points evident in Table 2 are that (1) the
pure technical efficiency of SOEs and POEs was

Table 2. Efficiency estimates

State-owned enterprises Collective enterprises Private enterprises Foreign-invested enterprises

Overall technical efficiency 0.1368 0.2651 0.1773 0.2973

Scale efficiency 0.4575 0.6379 0.6028 0.6326
Pure technical efficiency 0.2991 0.4156 0.2941 0.4698
Sample size 110 108 105 65
 38 Y. C. Ng and L.-Q. Wei
Table 3. Tobit estimation for overall technical efficiency

State-owned Collective Private Foreign-invested

enterprises enterprises enterprises enterprises

Constant 0.2134* 0.3122* 0.2489* 0.6141*

(0.0430) (0.0605) (0.0555) (0.0665)
Medium-sized enterprises -0.0020 -0.0593 0.0176 -0.0821
(0.0359) (0.0683) (0.0480) (0.0689)
Large enterprises -0.0439 0.0657 0.0171 -0.0783
(0.0448) (0.0507) (0.0643) (0.0825)
Percentage of production for export 0.0024* 0.0021** -0.0003 0.0019**
(0.0009) (0.0010) (0.0006) (0.0009)
Market share in China -0.0005 0.0027*** 0.0009 0.0063
(0.0009) (0.0015) (0.0011) (0.0030)
Manufacturing industry -0.0883 -0.1026*** -0.1012 -0.4137
(0.0329) (0.0547) (0.0520) (0.0689)
Beijing -0.0289 -0.0092 0.0541 -0.0404
(0.0445) (0.0563) (0.0450) (0.0743)
Downloaded by [University of Illinois Chicago] at 10:38 28 November 2014

Shanghai -0.0039 0.1985* 0.0834 0.0398

(0.0436) (0.0659) (0.0508) (0.0691)
Guangzhou 0.0314 0.0253 0.0687 0.0840
(0.0479) (0.0655) (0.0476) (0.0845)
SHRM score 0.1059 0.1409*** -0.0949 0.1586***
(0.1581) (0.0838) (0.0633) (0.0859)
Log likelihood function 28.7200 -4.4559 31.4989 5.3429
Sample size 110 108 105 65

Note: *, ** and ***Significant at ,1%, 1% and ,5%, and 5% and ,10% levels, respectively.

quite similar, and (2) all the non-SOEs suffered from
similar levels of scale efficiency. POEs were found to
have a slight advantage in the scale of their operations
compared with SOEs, adding further evidence to prior
study of the role of POEs (Wei and Lau, 2005).
Nevertheless, both SOEs and POEs had much room
to improve in terms of their technical efficiency.
Table 3 presents the results of regressing the overall
technical efficiency scores against explanatory factors
by type of enterprise. SHRM showed only a margin-
ally significant and positive relationship with effi-
ciency, and only for FIEs and COEs. Enterprise size
as well as geographic location did not statistically
influence overall technical efficiency. Except for the
POEs, export orientation significantly predicted better
efficiency. A higher national market share marginally
predicted better efficiency among COEs. In contrast
to the neutral industry effect found in other types of
enterprises, COEs involved in manufacturing were
found to be less efficient than their nonmanufacturing
counterparts.
those of prior studies, our findings indicated that
SOEs were less efficient than other types of enter-
prises. COEs may have taken measures to enhance
their competitiveness, or it is a result of transforming
some relatively efficient SOEs into COEs in the past
years, resulting in a higher estimated efficiency score
than previous estimates. Pure technical inefficiency
almost account for the overall inefficiency of the enter-
prises. The relatively poor in-scale efficiency in SOEs
was probably due to the institutional constraints hin-
dering SOEs in adjusting their scale of production.
With respect to the role of SHRM in firm perfor-
mance, this study showed that SHRM added value to
firm efficiency of POEs and FIEs, echoing the obser-
vations of previous studies. Traditional structures or
institutional constraints still hindered the adoption of
modern human resource management practices in
state firms compared with POEs in China. Chinese
enterprises more reliant on exports were more effi-
cient. Accordingly, maintaining a high degree of open-
ness can be an effective means to enhance the
performance of Chinese enterprises.

IV. Conclusions
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