The Impact of Privatization in Post-Communist Countries and China

1. The Impact of Privatization in Post-Communist Countries and China Presented by Saul Estrin Padma Desai Conference, Columbia University, April 25th 2007

2. Objective • To evaluate the economic effects of privatization, focusing on experiences in post communist countries and China • Joint work with Jan Hanousek, Evcen Kocenda, Jan Svejnar

3. Current View • Privatization in transition economies only improved company performance when other factors, eg privatization methods, ownership structures, market supporting institutions were appropriate.

4. Djankov and Murrell, 2002; Megginson, 2005 • Privatization does not always improve performance because: • Done badly • Wrong owners • Weak institutions

5. Problems with Literature • Endogeneity/selection problems • Findings often based on small, possibly unrepresentative sample surveys • Data usually cross sectional or short time period • Little time had elapsed since privatization

6. Reasons for New Survey • Large number of new papers on transition countries using large panel data sets and controlling for endogeneity • Emergence of new literature on impact of privatization of state owned firms in China

7. Methodological Issues • We use all available studies (150 plus) and categorise by quality of estimation method and sample size: • C1- large samples and control for endogeneity • C2 –smaller samples and control for endogeneity • C3 – use OLS methods

8. Methodological Issues Large variety of performance measures (TFP, labour productivity, profitability, financial performance, sales, employment, wages) • Focus on findings with respect to total factor productivity and profitability • Overlap with Djankov and Murrell limited

9. Privatization and Company Performance • We summarize findings on: • Foreign Direct Investors as Owners • Domestic Owners • Domestic and Foreign de novo Entrants

10. Foreign Direct Investors in Transition Economies • 9 C1 studies of TFP (out of 21); 4 C1 studies of profitability ( out of 13). All post 1998 • All find privatization to foreign owners increases company TFP or profitability

11. Foreign Direct Investors in Transition Economies • Holds in countries with both weaker and stronger institutions e.g Hungary, Czech republic, Poland, Russia and Ukraine • Examples: Brown Earle and Telegdy, 2006 (TFP), Claessens and Djankov, 1999 (profitability)

12. Foreign Direct Investors in China • Find positive significant effect of foreign ownership on TFP ( e.g Hu, Song, Zhang, 2005); rarely covered for profits • TFP improvements usually via joint ventures

13. Domestic Owners in Transition Economies • Domestic private ownership also raises TFP • the effect is quantitatively smaller than for foreign ownership • depends on institional quality:TFP effect positive in CEE but negative in Russia

14. Domestic Owners in Transition Economies • Two of the three C1 studies find the effects of privatization to domestic owners on profitability to be positive; other insignificant • 7 studies look at insider domestic ownership; effects insignificant in 6 and positive in one

15. Domestic Owners in China • Only one C1 Studies! • Findings mixed but generally identify a positive and sometimes significant effect on private domestic ownership on company performance (both TFP and profits)

16. Privatized Firms and de novo Entrants • Sabirinova et al, 2005 find foreign start ups less efficient than existing foreign owned firms, but more efficient than domestic start-ups, which are themelves more efficient than existing domestic firms

17. Conclusions • Clear picture is emerging from methodologically sound studies on transitions economies. • Despite reservations about the methods at the time, privatization not a failure when considered more than ten years hence

18. Conclusions 1 • Privatization to foreign owners clearly raises performance relative to state ownership, and to domestic private ownership • Privatization to domestic owners also raises performance if institutions are better developed

19. Reasons for Superior Performance of Foreign Owned Firms • Limited skills and access to world markets of domestic owners and managers • Domestic ownership sometimes associated with looting, tunnelling, defrauding minority shareholders, reducing performance • Privatization process prevented domestic ownership concentration initially; it took time to squeeze out dispersed shareholders.

20. Foreign versus Domestic Owners in Transition • Their corporate governance compensates for underdeveloped local institutions, laws and norms • They bring access to global distribution networks. • Domestic owners can achive the same in time, and are increasingly doing so however.