1. Introduction
In the 1950s, the central government of China invested in the construction of 87 state-owned forest enterprises (SOFEs) in the provinces of Heilongjiang, Inner Mongolia, and Jilin to support national industrial construction and meet the demand, in economic development, for forest resources such as timber. Initially, SOFEs not only vertically operated the forestry industry but also engaged in horizontal integration [
1], and operated under the principle of “
zhengqi heyi”, which means the integration of government entities and business corporations. SOFEs took on all social affairs management and government administrative functions and were the core organizational entities within state-owned forest regions (SOFRs) in Northeast China. While this integration of functions strengthened national political power, reduced management costs, and restored the national economy under the planned economic system, it also burdened enterprises with heavy social burdens and exacerbated the overconsumption of forest resources [
2]. In 1992, China officially established a socialist market economy system and promoted the market-oriented reform of state-owned enterprises. Consequently, SOFEs began to explore the establishment of a modern corporate system, but this reform did not change the fundamental nature of SOFEs performing social functions, and social welfare spending remained a huge burden for SOFEs. By the early 21st century, 60 out of the 84 SOFEs had depleted most of their mature forests, and almost all SOFEs were in financial arrears [
1]. Entering the 21st century, under the influence of the Natural Forest Protection Program (NFPP), SOFEs gradually began to reduce timber production and transition towards forest conservation. With a sharp decline in timber revenue, some enterprises attempted to transfer part of the social service system to local governments. In 2015, the Central Committee of the Communist Party of China and the State Council issued the “Guiding Opinions on Reform of State-owned Forest Regions”. One of the important reform elements was to gradually separate government functions from these enterprises according to local circumstances (“
yindi zhiyi”). Under the promotion of the central government, the administrative powers of the forestry communities previously held by SOFEs gradually transferred to local governments, bringing an end to the decades-long system of “
zhengqi heyi”.
After the reform, SOFEs were positioned as ecological public interest state-owned enterprises, with their primary goal being the protection of state-owned forest resources. However, this does not mean that the economic benefits of the enterprises are unimportant. Maximizing the commercial value of market-oriented operations within SOFEs is also one of the key objectives of the reform of the SOFRs. Enhancing the economic efficiency of SOFEs will contribute to better ecological forest management, improve the living standards of employees, and reduce dependence on national NFPP funding. Many scholars have analyzed the impact of factors such as forest certification [
3], managers’ personal characteristics [
4], and government investment in science and technology [
5] on the economic performance of forest enterprises. However, relatively less attention has been paid to institutional factors like their governance structure. Han et al. [
6] regarded SOFEs as “social firms”, where a company’s objective is to improve the well-being of local communities by increasing economic, environmental, and social outcomes, and proved that there was no significant trend in the pure technical efficiency of enterprises during the reform period, although there was some improvement in pure technical efficiency within the framework of profit maximization. This reminds researchers that SOFEs cannot be simply regarded as market-oriented enterprises, but rather to comprehensively consider their social and political attributes.
Current research on the reform of SOFRs in Northeast China mainly focuses on the implementation process of the reform and its outcomes in terms of economy and ecology [
7,
8,
9]. Some studies have noticed the impact of the reform on forestry communities and residents’ livelihoods [
10,
11,
12]. However, the transformation of forestry community governance architecture, the changes in the roles of SOFEs in forestry community governance, and the impacts on SOFEs have not attracted widespread attention from scholars. Before the reform, SOFEs were the sole entities in regional governance, undertaking functions such as social services, social management, social security, and urban construction that should have been provided by the government or society. Relieving SOFEs of their heavy social burdens is not an easy task. In practice, SOFEs are in superior conditions compared with local governments, in terms of administrative level, management capacity, and personnel quality [
13]. The limited financial resources of local governments constrain their ability to fulfill social service functions in forestry communities [
14]. Therefore, during the reform’s transition period, SOFEs had to replace local governments and to continue to bear the actual responsibilities, substantive work, and personnel costs of providing public services and managing communities, while local governments could enjoy a free ride from SOFEs in the governance process. However, SOFEs do not have the legal qualifications to participate in the specific agenda of the governance of forestry communities now, facing operational dilemmas of “taking governance responsibility without management authority”, which restrict the effectiveness of collaborative governance between SOFEs and government. In other words, the role SOFEs play in forestry community governance does not receive formal recognition from the authorities, and mechanisms for cooperative governance and mechanisms for the coordination of regional governance rights and responsibilities have not been established between SOFEs and local governments, let alone the sharing of the costs of governance. Moreover, after the management of forestry communities was localized, the power and responsibilities of social governance, which were previously exercised by SOFEs, have been fragmented among different functional government departments. In the process of participating in the governance of forestry communities, SOFEs need to coordinate with multiple government functional departments, which further increases the difficulties and challenges faced by SOFEs in governance agendas due to the involvement of different policies, regulations, and procedures. Especially for forestry communities, which were established based on the natural distribution of forests, the phenomenon of geographical distribution across administrative boundaries is particularly prominent. Dealing with cross-domain affairs caused by the mismatch between administrative management scales and ecological issues has become a common challenge for SOFEs and local governments to face together. In short, SOFEs and local governments, as the co-management institutions of forestry communities, are relatively decentralized in terms of governance authorities, governance responsibilities, and other governance elements such as concepts, mechanisms, and information, and they face a pronounced problem of governance fragmentation.
The term “fragmentation” implies that the governance field is marked by a patchwork of public and private institutions, which differ in nature, constituencies, spatial scope, subject matter, and objectives [
15]. Research on institutional fragmentation originated in international law, and can be traced back to the mid-19th century when international law fragmentation began to be studied, as did the overlap and conflicts between international treaties [
16]. Currently, fragmentation has become a common governance issue, leading to a rich body of research outcomes in fields such as government administration [
17] and resource management [
18]. The consequences of fragmentation, whether they are positive or negative, have not yet been unanimously agreed upon by academics. Some scholars argued that governance fragmentation facilitates small-scale multilateral cooperation, enabling faster, more innovative, and further-reaching decision-making among participants [
16]. However, other scholars pointed out that under a fragmented governance architecture, the boundaries of participants are not always clear, which may result in conflicting decisions, increased redundancy, and hindrances to the formation of common visions, aspirations, and actions. It follows that organizational diversity itself does not necessarily lead to efficiency [
16]. Back to the SOFRs in Northeast China, scholars have noticed that the governance fragmentation of forestry communities has led to a decline in regional public services and the living standards of residents [
11], but research conducted from the economic perspective, like the impact on the economic performance of enterprises, has not yet received attention. The stripping of functions is expected to alleviate the burden on SOFEs to some extent and allow them to concentrate more on ecological protection and industrial transformation. Simultaneously, a fragmented governance architecture may strengthen the connection between the forest regions and the locals, while more communication with governments could also enhance SOFEs’ political resources, aiding them in acquiring more economic resources [
19]. However, the broad and dispersed polycentric governance systems resulting from addressing fragmentation could lead to high transaction costs when simultaneously accommodating various interests [
20]. As non-legitimate and non-authoritative governance entities, governance affairs, including supplying public services undertaken by SOFEs may greatly increase communication and coordination costs between SOFEs and local governments. The transaction cost theory in new institutional economics has become a good tool for investigating economic organizations, including horizontal diversification, multinational corporations, strategic alliances, supply chain relationships, and public–private partnerships [
21], as well as for analyzing development policies and evaluating the effectiveness of institutional arrangements in resource management [
22], and has been widely applied in fields like fisheries co-management [
23], forest management [
22], and environmental governance [
20]. From the perspective of transaction costs, an imbalance between costs and benefits can undermine institutional effectiveness and even lead to institutional collapse [
20]. A sound institutional framework can reduce the waste of management resources and market inefficiency through better management measures [
24], thereby promoting economic performance. In other social science research fields, such as public affairs management, however, the importance of transaction costs has yet to receive widespread attention. So, what impact does the governance fragmentation of forestry communities have on the economic performance of SOFEs? Is the transaction cost for SOFEs when participating in co-governance with local governments the key mechanism for the impact of governance fragmentation? This study will conduct empirical econometric analysis to address these above two questions with collected panel data from 2015 to 2022. The focus of the research is, on the one hand, to scientifically construct an indicator that can measure the fragmentation level of governance architecture for forestry communities, and to analyze its impact on the economic performance of SOFEs; on the other hand, it is to analyze whether the transaction costs paid by SOFEs under fragmented governance architecture are the key mediator variable.
This study holds significant theoretical and practical implications. The analysis of the governance fragmentation dilemma in forestry communities during the reform transition period and their economic impacts on SOFEs will enrich the research landscape related to forestry reform from a social governance perspective and fill gaps in the existing literature, while also helping to reveal the lingering effects of the 20th-century planned economic system on the construction of the market economy in China and deepening scholarly understanding of the unique corporate responsibilities and operational mechanisms of Chinese SOFEs. Furthermore, by focusing on the interaction between SOFEs and government within a regional governance architecture and viewing social management and public service provision as a “commodity”, this study delves into the forms and influences of transaction costs that SOFEs incurred to achieve co-governance under a fragmented governance architecture and its economic impact on enterprises, which will contribute to the field of transaction cost economics by expanding the applications of the theory in the field of public governance. In terms of practical significance, the insights gained from this study will assist SOFEs in better handling the relationship between their economic and social responsibilities, promote the improvement of the governance architecture in forestry communities, and reduce the political and social dependence of forestry communities and local governments on SOFEs. This will foster a conducive environment for co-governance between governments and SOFEs, facilitating the deep transformation of SOFEs and achieving their high-quality economic performance.
This paper is divided into six sections. Following this introduction, the
Section 2 provides an overview of the institutional background of SOFEs participating in community governance in SOFRs in Northeast China and a literature review on governance fragmentation and transaction cost economics, based on which the research hypotheses are formulated. The
Section 3 outlines the data sources, research methods, and selection of model variables, with a particular focus on the measurement of governance fragmentation. The
Section 4 presents the regression results. The
Section 5 and
Section 6, respectively, discuss and summarize the findings.
6. Conclusions and Suggestions
6.1. Conclusions
This study attempts to investigate, for the first time, the economic impact of governance fragmentation after the SOFR reform of SOFEs. This study conducts a theoretical analysis using the new institutional economics and transaction cost theory and verifies hypotheses by applying a fixed-effects model with data collected on the economic output of SOFEs in Northeast China and the status of governance fragmentation of forestry communities from 2015 to 2022. The main findings are as follows.
(1) The fragmented governance architecture between SOFEs and local governments for forestry communities has a significant negative impact on the economic performance of SOFEs.
(2) The high transaction costs incurred by SOFEs in achieving community co-governance with local governments have been proven to be a key mediation mechanism by which governance fragmentation of forestry communities affects the economic performance of SOFEs. High transaction costs lead to the dispersion of resources and efforts, making it difficult for SOFEs to concentrate on forest management and industrial production, as well as weakening trust relationships between SOFEs and local governments. These results are further confirmed through a series of robustness checks.
(3) In addition, the impact of the governance fragmentation of forestry communities on the economic performance of SOFEs varies in terms of SOFEs’ own economic situation, their operating scales, and whether there was a clear geographical management boundary with local governments.
6.2. Suggestions
The diversification of governance entities is an inevitable trend of the times and a practical requirement for achieving good governance. Under the current high transaction costs, a key reason why collaborative governance among diverse governance entities in SOFRs in Northeast China can be sustained is that SOFEs can cover some of the expenses from the NFPP funds they receive from the state. However, once SOFEs lose financial support and face the high transaction costs caused by a fragmented governance architecture, their collaborative governance relationship with local governments in forestry communities may deteriorate, potentially leading to the collapse of the forest governance system. Therefore, mitigating the negative consequences of fragmentation may require more proactive institutional design to reduce transaction costs.
(1) Local governments should incorporate forestry communities into their governance scope and take on the responsibility of administrative management and public service provision in these communities through the central adjustment of the NFPP funding channels for affairs and personnel that have been transferred to the governments. Local governments should also incorporate SOFEs and forestry communities into local development plans, including increasing investment in enterprises, and covering forestry communities in regional educational groups and medical consortia. This will help alleviate the development burden on SOFE and improve the level of forestry community construction. Additionally, local governments should utilize information technologies such as big data, artificial intelligence, and the Internet of Things to establish more flexible and efficient communication channels within forestry communities. This will enable online operations for tasks such as information dissemination, policy consultation, permit processing, public services, and neighborhood assistance, and achieve the sharing of information resources with SOFEs.
(2) Local governments need to recognize the advantages of SOFEs in forestry community governance, including their local knowledge and community authority. They should strengthen communication with SOFEs by establishing joint meetings and other means, and grant SOFEs the autonomy and coordination capabilities that are consistent with governance responsibilities, so as to facilitate the integration of SOFEs as important governance partners into the local social governance system, unleashing synergies to their fullest potential. Introducing market mechanisms is one of the important means to enrich the supply of regional public goods. For public service products that the government is unable to provide or provides inefficiently, they can be delegated to SOFEs or other non-governmental organizations, but relevant costs should be shared through means such as purchasing socialized services. More importantly, it is necessary to develop clear cooperation agreements, clarify responsibility attributions and establish effective monitoring indicators, to prevent from the risk of local government free riding and ensure the realization of regional governance responsibilities on the basis of consistent rights and responsibilities.
(3) To handle relevant affairs across administrative boundaries in forestry communities, it is essential to integrate the governance resources of neighboring local governments and establish joint governance plans to address conflicts arising from crossing geographical boundaries, administrative boundaries, and functional boundaries. Holding regular joint meetings can ensure the coordination and consistency of different governments in policy formulation and implementation. Alternatively, the establishment of specialized cross-departmental or cross-regional coordinating committees may be considered to specifically oversee, coordinate, and integrate the affairs involving multiple departments and regions within the stated-owned forest regions. Utilizing information technologies can also reduce information barriers and resource wastage.
6.3. Implications and Limitations
Top-down reform cannot take into account all the details at the initial stage of design, so “acting according to circumstances (yindi zhiyi)” becomes a good tool for promoting implementation of the reform. However, when dominant departments with power demand cooperation from weaker departments and overlook the actual situation of the latter, it may lead to the reform having unexpected consequences. This empirical study on the governance fragmentation of forestry communities and its impact on SOFEs’ economic performance will remind policymakers and analysts of the flaws in the forestry community co-governance system during the transition period of SOFRs. Furthermore, it is of great importance to have a correct understanding of the transaction costs in SOFEs participation in co-governance, especially for enterprises with weak economic foundation, cause the SOFR reform should not harm the benefits of SOFEs and their local residents. If the cooperative mechanisms and cost-sharing mechanisms for co-governance of forestry communities are not properly established after the separation of governmental functions and social functions from enterprises, it may affect the sustainability of enterprise development and threaten the legitimacy and efficiency of governance, as we have analyzed.
However, due to limitations in data availability, this study still has the following limitations.
(1) In terms of data volume, this study only utilizes data from 39 SOFEs belonging to two forestry industry groups that could be collected at present. Regarding the sample structure, although this study concludes on the basis of empirical observations that local governments are free-riders in forestry community co-governance, due to constraints in data availability, this research did not analyze and calculate the transaction costs incurred by local governments to achieve co-governance of forestry communities, nor does it compare them with transaction costs incurred by SOFEs. Additionally, in terms of indicator selection, despite using interview materials to corroborate the forms and impacts of transaction costs in the study, inevitable subjectivity still exists, which is also influenced by data availability. In the future, if possible, we hope to collect more data from SOFEs in Northeast China and collect additional data from government or third parties to ensure a more representative sample, which will contribute to further demonstrating the importance of transaction costs in collaborative governance of public affairs. On the other hand, our next step will be to develop a wider range of alternative and operational indicators to measure governance fragmentation and transaction costs to enrich the quantitative data.
(2) This study also has limitations in terms of cross-industry comparisons. Although SOFEs in Northeast China exhibit distinct characteristics and incomparability in terms of the content, scope, and scale of fulfilling social functions compared to state-owned forest farms in other regions, they bear great similarities to large-scale state-owned enterprises which were also historically operated under the principle of “zhengqi heyi” in areas such as agricultural reclamation and oil fields in China. Compared to forest regions, the progress and achievements in the transfer of social functions from state-owned enterprises in agricultural reclamation areas and oil fields have been faster and greater. However, due to limitations in data availability, this study has not yet conducted comparative analyses in this regard. In the future, meaningful conclusions may be drawn by analyzing the reform progress, the community governance structures post-reform, and their impacts on economic performance of enterprises across various industries and fields.
(3) Lastly, it must be acknowledged that this study also has limitations in its research dimensions. Governance fragmentation, besides its economic impacts, may also have implications for environmental sustainability, residents’ welfare, and long-term social stability. Conducting research in these areas contributes to a comprehensive understanding of the social, economic, and ecological effects of regional governance architecture. Due to constraints in length and data availability, this study did not explore or discuss these aspects. In the future, we hope to develop more indicators to delve deeper into the impacts of governance fragmentation on the level of regional public service, the quality of public safety, the satisfaction and welfare of residents, and the sustainability of forest resource protection. By enriching the dimensions of the research, this will provide theoretical foundations and data support for optimizing the governance system of forestry communities.