The reform of China’s state-owned enterprises (SOEs) is the single largest effort to change economic institutions ever undertaken. The immense scope of the program and the rapid pace at which it is occurring are without precedent: the changes will affect more than 200,000 SOEs employing more than 100 million workers and generating roughly half the nation’s industrial output. As the Chinese government grants these enterprises more commercial freedom and puts in place the legal and financial framework essential to a market economy, the SOEs themselves face a tremendous challenge in developing competitive strategies, renewing their organizations, restructuring their financing, and reacting to a fast-changing regulatory environment. While this hard, nuts-and-bolts work of reform is under way, foreign MNCs have unique opportunities to ally with or acquire SOEs—and to help shape China’s transformation.

Revitalizing the ownership structure, management, and operational performance of China’s SOEs is an economic necessity: subsidies to SOEs topped US$90 billion in 1992—an unsustainable 14 percent of government revenue. It is also a philosophical necessity: the country’s leaders now recognize that continued economic growth depends on the introduction of market and business discipline. Indeed, on the success of...