Thursday, 11 February 2010

Privatisation, state ownership and productivity: evidence from China

The effect of changes in ownership on the performance of firms is still debated in some quarters. Most of the evidence suggests that firm performance improves when SOEs are privatised. A question that remains is, What happens to firm performance if a firm is re-nationalised? A paper, Privatisation, State Ownership and Productivity: Evidence from China, from the International Journal of the Economics of Business looks at these privatisation/nationalisation issues, for the case of China.

The paper examines the relationship between the transfer of ownership between the public and private sectors of Chinese industry, and its impacts on performance. They link ownership changes to productivity growth, and demonstrate that privatisation contributes significantly. An interesting extension that the authors deal with is that they look at firms that are taken back into state ownership, and evaluating the productivity growth effects of this.

The paper offers several contributions to the analysis of ownership change and productivity. Their results confirm that privatisation in China is important for generating productivity growth. They find a degree of cherry picking by foreign investors when acquiring a stake of SOEs, but not when investing in private firms. Interestingly, foreign investors also have the effect of generating further productivity growth among hitherto SOEs. This highlights another contribution of this paper, which is to distinguish between different types of ownership change in a manner that had not been done previously for China, and seldom at all. The results indicate that the transfer of SOEs to the private sector is important for productivity growth, and there is a consistent ranking of the productivity growth effects of privatisation. Changing to foreign (foreign includes Hong Kong, Macau, Taiwan, as well as other foreign counties) ownership generates the greatest productivity-enhancing effect among SOEs, followed by the transfer to domestic private individual enterprises (domestic private individual enterprises include four types of private firms: solely private funded enterprises, private cooperative enterprises, private limited liability corporations, and private share-holding corporation limited), then to domestic private company (domestic private companies include the rest of the private enterprises, mainly share-holding corporation limited and other limited companies.), and finally to collectively owned enterprises (COEs are economic units such that the assets are owned by collectives. The collective here means the community in the city or rural area), which is still significant. Finally, the paper's results question the wisdom of taking firms back into public ownership, as this appears to be associated with lower productivity, both in terms of level and growth.

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