The tendency of the organizational structure of main industries towards dispersion has been an invariable characteristic of the Chinese economy before and after the adoption of the policy of reform and opening up to the outside world. Starting from this remarkable feature, and from a historical point of view, this article explains the formation of the Chinese industrial organization with local state-owned enterprises as the leading actors and the mechanisms for this industrial organization's changes.
China had adopted an economic system in which administrative power of the State Government was decentralized, and this had given rise to scattered industrial organizations in the mainstay industries among many localities. In the early 1970s, the “five tiny industries” - iron and steel, chemical fertilizers, farm machinery, power and cement industries - were composed mainly of local state-owned enterprises at the county level, which existed as major suppliers of capital goods for local economies. This decentralized industrial strategy in favor of local enterprises was closely associated with China's geographical allocation of resources and its worsening international relations characterized by the escalation of the Vietnam War in the 1960s and the Sino-Soviet Armed Confrontation of 1969.
The scattered local industrial organizations which had taken shape before the 1980s had a certain technological foundation, strategic resources and market shares regionally and were a continuation of the historical stock of capital to the period of the Reform and Opening Up era. The tendency of various industrial organizations towards dispersion has remained despite the series of economic reform measures and the industrial policy.
