Limited Liability Companies in Republican China

This paper examines the economic role of limited liability companies in Republican China. The concept of limited liability was first introduced into Chinese law and custom by the 1904 Qing Company Law, and would assume increasing economic importance in following decades. Although scholars have explored Republican limited liability companies from a variety of social and legal perspectives, including several micro-histories of specific companies, no systematic attempt has been made to assess their economic significance from a macro, or at least regional, level. This paper attempts to do so. It argues, first, that limited liability companies had relatively little impact on the development of Chinese manufacturing: they were few in number and, in most cases, surprisingly small in scale. The paper then proposes that this can be explained by the general weakness of China’s government institutions during this era. Unlike other property, contract and business institutions, limited liability investment agreements could not, in general, be successfully enforced through the decentralized self-regulation of entrepreneurs, merchants, and investors. This was partially because the highly personalized nature of most Chinese business relations made it difficult to shield company management decisions from the interference of limited liability investors. Consequently, these investment agreements often required effective state enforcement, something that Republican governments were rarely able to provide due to political turbulence and the relatively limited administrative and legal infrastructure they inherited from the Qing. Over time, most entrepreneurs came to prefer simpler and more enforceable business structures over limited liability agreements.