Situating regional advantage in geographical political economy: Transformation of the state-owned enterprises in Guangzhou, China

► We examine the nature and dynamics of regional adaptation in a socialist transitional economy. ► We situate the transformation of China’s SOEs in a historically contingent and place-sensitive changing political economy. ► The source of successful regional adaptation is not confined to local institutional dynamics. ► The theorization of regional advantage should pay attention to its positionality within a specific national regulatory regime. ► We advocate a place-contingent treatment of soft budget constraints in studies on transitional economies. Drawing upon insights from geographical political economy, this study examines the causal processes and mechanisms that underlined the growth and adaptation of state-owned enterprises in mechanical and electrical sectors (SOMEEs) in a leading Chinese city since market reforms. It reveals that the geographically specific and historically contingent political economy in which SOMEEs in Guangzhou were situated before economic reforms was the fundamental force underlying their successful adaptation in the post-reform period. SOMEEs in Guangzhou prior to market reforms were placed in a geographical political economy characterized by a special market orientation toward the production of low-end machinery for local needs and a loosely-coupled political linkage with the state apparatus. While such place-specific market and institutional relations were not favorable to the growth and survival of SOMEEs in Guangzhou in the Mao era, they have constituted an important source of regional advantage to enforce both market competitive pressure and hardened budget constraints on SOMEEs in Guangzhou and propel them to adopt efficient market-adaptation strategies and practices during the post-reform period. There is a need for ‘scaling up’ the theorization of regional advantage to go beyond the exclusive emphasis placed on the institutional dynamics endogenous to regional economies and take more seriously the unequal positions of regions within the extra-local structural relations of actually existing political-economic regimes. The paper advocates a place-contingent treatment of soft budget constraints in future studies on state-owned enterprises in China and other transitional economies.