I calculated the three diversification ratios for all of China’s listed companies from 1991 to 2002 and report the results in table 6-11. However, I have limited information for China’s listed companies from 1991 to 1994, thus I will analyze the diversification trend of China’s listed companies from 1995 afterwards. From 1995 to 2002, the number of listed companies on both Shanghai and Shenzhen Stock Exchanges increased from 300 to 1,186. I classified all the firms listed in each year in this period into different categories according to Rumelt’s rule. By looking at the trends over time for this classification procedure, I identified several interesting patterns in these companies’diversification transition paths. The numbers and percentages of different categorized firms are shown in Table 6-10 and Table 6-11.
To analyze the trend of China’s listed companies toward diversification, I follow Rumelt to pick up three years (1995, 1998 and 2002) to further estimate those companies’pattern of change. The reason I select these three years is that I want to study the changing pattern of China’s listed companies in three year blocks and compare it to what has happened to U.S. firms.
For this analysis, I first classify the strategic categories into four major classes: Single Business, Dominant Business (including Dominant Vertical, Dominant Unrelated and Dominant Linked), Related Business (Related Linked) and Unrelated Business (Conglomerates). The observed percentage of firms in each strategic category is listed in Table 6-12. The same information is portrayed graphically in Figure 6-3 and Figure 6-4. Both reveal a dramatic pattern of cha nge. Between 1995 and 2002 the percentage of diversified corporations more than tripled; the percentage of firms following Related or Unrelated Business strategies of expansion rose from about 14 percent to about 71 percent in the twelve-year period. Clearly, there has been a basic change in the product- market scope of the listed companies in China in this period.
The most striking change in any individual group is the decline in the number of Single Business firms among all the China’s listed companies. Comprising more than eighty percent of all the companies in 1995, those Single Business firms drop to less than thirty percent of the total. Equally noteworthy was the increase in listed companies that followed Unrelated Business strategies. In 1995 this group accounted
for only 14 percent of the total, but by 2002 more than two out of every three firms fell into the Unrelated Business category. Another important trend is the increase in the category of Dominant Business. The percentage of firms in this category has grown from zero in 1995 to about 34 percent in 2002. The behavior of sub-classes of the Dominant category shed some light on how this happened. Dominant Linked almost remained to be zero, contributing nothing to the increase. Most of the increase comes from the percentage increase in Dominant Unrelated, from 0 percent to around 30 percent. The importance of the Related Business category is just like that of Dominant Linked, always just above zero.
The basic pattern of change in the composition of China’s listed companies between 1995 and 2002 was the increase in the Dominant and Unrelated Business categories at the expense of the Single Business category. But how did this and other redistributions come about? Did most of the Single Business firms of 1995 adopt strategies of diversification by 2002, or was the increase in Unrelated Business category caused by the entrance of newly listed companies?
To separate the effect of strategic change from that of newly listed companies’ effects, I looked at those firms that were initially listed in 1995 and were kept listed through 1998 until 2002. Three hundred companies satisfied this condition, and the distributions by category for these firms are shown in Table 6-13. Clearly, there was a significant strategic change among these firms: 58 percent of these firms moved from one category to another between 1995 and 2002, and most of these moves were in the
direction of increased diversification. The changes made by the firms that were listed in 1995 resulted in strategic class populations very much like those of all the China’s listed companies.
To make this point in more detail, I tracked all the listed A shares (listed in RMB) that had their IPOs in the years 1995, 1996, and 1997. I recorded the diversification category distribution of these firms in their IPO year and then again five years after they were first listed. For example, for the firms that were initially listed in 1995, I compare their diversification category between in 1995 and in 2000. The comparison is listed in table 6-14. From the table, I find a clear strategic change of China’s listed firms who had an IPO sometime in the 1995 to 1997 period. For these firms, the percentage of Single Business firms has decreased more or less during a five year period. The largest decrease is for firms initially listed in 1997 (45.93% from 1997 to 2002). In the meanwhile, the percentage of Conglomerate firms has increased to a certain extent. Another trend is the increase of Dominant Unrelated firms. During every five-year period, the group of Dominant Unrelated firms is expanding. This expansion reaches a peak in the 1996 to 2001 period (an increase of 22.77 percent).
This shows a trend that firms are moving from the category of Single Business to the categories of Conglomerates and Dominant Unrelated.
Table 6-12 also shows the possibility that there exists a high degree of stability in each five year period in the pattern of transitions among the diversification categories.
Using the transition rate for 1995-1998, I projected the category distribution in 2002
and compare the projected percentage with that of the actual one in Table 6-15. The projected percentages comprise the supposed distribution if from 1998 to 2002 the number of firms in each category increased or decreased at the same rate as that of those in 1995 to 1998. Compared to the figure is the actual distribution across all the categories I observed in 2002.
The results of this procedure are interesting. Except for Dominant Unrelated, Dominant Linked and Related Linked, the other categories’percentages are either magnified or lessened. The vital reason behind this is that China’s listed firms have been moving toward a diversification strategy at a much faster pace during 1998-2002 period than during 1995-1998 period. Hence, I find a declining percentage of Single Businesses and a rising rate of Conglomerate formation in the latter time period.