Privatization and Productivity in China

Abstract

We study how ownership affects productivity. Privatization of state-owned enterprises (SOEs) was a major economic reform during China's rapid growth, but its true impact remains controversial. Although private firms seem more productive than SOEs, the government selectively privatized (or liquidated) non-performing SOEs. To address this selection problem, we exploit a lag structure in the timing of ownership changes (i.e., privatization/liquidation takes time to implement). Results suggest private firms are 53% more productive than SOEs on average, but the benefits of privatization take several years to fully materialize. This productivity gap is smaller among larger firms and in economically more liberal times and places; it is larger in consumer-facing and high-tech industries. Increased managerial freedom appears to be the primary channel of productivity improvement.

Keywords: Privatization, Production function, Productivity

JEL Classification: D24, L11, L33, O47, P31