Thursday, 2 March 2017

Is state-ownership detrimental to firm performance? New Zealand evidence

The evidence on the relationship between state-ownership and performance across the globe is mixed, so what does the New Zealand experience have to say on the issue? A forthcoming paper - New Zealand State-owned enterprises: is state-ownership detrimental to firm performance? by Kenny Ka Yin Chan, Li Chen and Norman Wong - in New Zealand Economic Papers looks at the New Zealand situation.

The abstract reads,
This study examines the performance of State-owned enterprises by conducting a contemporary examination in the New Zealand environment. Applying both a cross-sectional and time-series approach, we document significant and consistent evidence that state ownership is negatively associated with firm profitability compared to private ownership. We also find evidence suggesting that state ownership is positively associated with asset turnover and labour intensity, but not associated with labour turnover. This implies that SOEs on average experience a higher asset turnover due to excessive labour employment, compared to private firms.

The paper's conclusion states,
We investigate the relationship between state-ownership and firm performance from two perspectives. Cross-sectional comparisons examine the hypothesis of whether SOEs inherently perform worse than private firms, while time-series analyses test whether performance improves after privatisation. We find consistent results between the cross-sectional and time-series analyses.

The cross-sectional evidence suggests a significant negative association between state ownership and firm profitability, in line with prior research. We do not find a significant relation between state ownership and labour turnover. However, we find SOEs are more efficient in utilising operating assets to generate revenues but are less efficient in terms of labour employment compared to private firms. Consistently, time-series results from industry-adjusted models reveal significant improvements in profitability, as well as declines in both asset turnover and labour intensity after privatisation. Given the lack of compelling evidence on labour turnover, SOEs’ superior efficiency in ATO appears to come at the expenses of excessive labour employment.

The results contribute insights to academia and policy-makers that may be useful. Prior literature has generally only considered performance differences from either a cross-sectional or time-series perspective, so by examining both angles together, our study provides a more holistic view of the issue. Additionally, this study adds to an emerging line of country-level studies (e.g. Ejelly (2009) on Saudi Arabia; Nahadi and Suzuki (2012) on Indonesia; Lau and Tong (2008) on Malaysia), by examining New Zealand privatisations. Given the National government’s campaign of a mixed-ownership model, empirical evidence of the effects of privatisation becomes vital. Importantly, given that both the cross-sectional and time-series evidence finds a positive relationship between private-ownership and firm profitability, the regime to privatise SOEs is not only a method of raising government funds but also a superior form of commercial management.

Overall, this study addresses an apparent gap in the New Zealand literature regarding the performance effects of state- versus private-ownership. This insight is becoming increasingly important in the near future, as the National government continues their regime of partially privatising the major SOEs.
One thing that is worth mentioning is that privatisation should not be seen as a way of "raising government funds". If you really want to raise money then you would just sell monopolies and that would do nothing for the economy. The advantages of privatisation come from increased efficiency and increased competition but efficient firms in competitive markets sell for less than monopolies, so raising fund should be well down the list of priorities. Also, as I have argued before it can be reasonably argued that the practice of selling less than 51% of an SOE does not constitute privatisation. Under such a plan, the state remains the primary force responsible for deciding the outputs (and possibly the inputs) of the firm, rather than the market. This means that programmes such as the recent policy by the New Zealand government of selling just 49% of an SOE is not genuine privatisation. This policy means that, in practice, little will change in terms of the behaviour of the SOEs: they will remain, for all intents and purposes, government-controlled entities. This contradicts the very reason for privatising SOEs in the first place. Evidence on the difference in performance between fully and partially privatised firms would be interesting.

1 comment:

Tim Worstall said...

With he British nationalised firms a common response to "they were pretty terrible, weren't they?" has been, well, yes, the management were bad, didn't invest properly.

At which point the retort is well, so when we nationalise a firm we get bad management that won't invest then?