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by Saul Estrin LSE

Privatization and Corporate Governance Before and After the 2007/9 Crisis: Lessons from Developing and Transition Countries*. by Saul Estrin LSE.

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by Saul Estrin LSE

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  1. Privatization and Corporate Governance Before and After the 2007/9 Crisis: Lessons from Developing and Transition Countries* by Saul Estrin LSE *Presentation based on Estrin,S., Hanousek, J., Kocenda, E. and Svejnar, J., “The Effects of Privatization and Ownership in Transition Economies”, Journal of Economic Literature, 2009

  2. Outline of Presentation Foreign investment, ownership and governance in developing and transition economies Policies, Institutions and Privatization Sequencing of Privatization Privatization and Company Performance Conclusions

  3. Corporate Governance and Ownership • In developed economies, most large firms are joint stock and important areas for research are the ways in which the principal (owner) controls the managers (agents). Issues include • Ownership concentration • Extent of managerial or employee ownership • In developing and transition economies • Institutional context makes enforcement of agency contracts more costly – leads to concentrated ownership (family or state) • Weak capital market institutions leads to emergence of diversified firms (business groups) • Foreign owners may control a relatively large share of assets • With such concentrated ownership, many corporate governance issues take the form of principal-principal conflicts

  4. Foreign Direct Investment to Developing and Transition Economies • Increasingly important share of global FDI – accelerated rather than slowed by crisis • For the first time in 2009 FDI to developing economies overtook FDI into developed economies • Remains highly concentrated to a few major transition and developing economies e.g. China, Russia, Brazil and India

  5. Real GDP growth, %pa

  6. Global FDI inflows (US$ bn)

  7. Global FDI inflows (% of GDP)

  8. Small em club (FDI inflows, US$ bn)

  9. Some Evidence on Ownership Concentration in Transition and Emerging Markets • Top 15 families own 62% of listed assets in Indonesia, 55% in Philippines, 53% in Thailand and 38% in Korea. (Peng 2007) • On average in East Asia, 68% of listed companies are owned by a single controlling owner. This ranges from 77% in Korea to 40% in Thailand (Peng 2007) • Top management derives from the family of the largest shareholder in 85% of listed firms in Malaysia and Indonesia, 81% in Korea and 80% in Taiwan (Peng 2007) • In Russia in 2003, the 22 largest private domestic owners control 42% employment and 39% of sales (Guriev and Rachinsky 2005) • These outcomes unlikely to be affected by recent crisis; if anything the converse

  10. Purpose of JEL Study To evaluate the economic effects of privatization, focusing on experiences in post communist countries and China Transition economies as a laboratory of systemic change

  11. Findings Privatization to foreign owners raises efficiency; less clearcut in China because domestic ownership also raises TFP Domestic private ownership raises TFP (but less than foreign ownership) in CEE and Ukraine but not in Russia

  12. Findings Ctd Ownership concentration important Worker ownership does not have negative effect on performance New firms more efficient than existing ones, especially foreign start-ups

  13. Policies, Institutions and Privatization Megginson and Netter (2001) show privatization improves company efficiency and profitability in developed economies Results confirmed by Megginson and Sutter, 2006, for developing economies Positive association between ownership concentration and firm performance in Asia (Heugens et al 2009) Results stronger for foreign than domestic and “external” than “insider” owners

  14. Sequencing of Privatization Govenments sequence privatization to Avoid transaction and congestion costs Reveal information about firms to buyers Avoid political opposition (gradualism) Avoid unemployment

  15. Which Firms Do They Privatize First? Gupta,Ham, Svejnar (2008) Firms that are more profitable Firms with higher market shares Firms in industries subject to greater demand uncertainty and in downstream industries (needing flexible management) Important implications for reverse causality

  16. Privatization and Company Performance Foreign Investors Domestic Owners Entrepreneurs

  17. Methodological Issues Previous studies -- astonishing variation in findings, from strong positive to strong negative effects of privatization on performance

  18. Methodological Issues Reasons partly methodological: early studies used small (unrepresentative) samples, unable to control for selection/endogenity, and data period too short We use all available studies (150 plus) and categorize by estimation method

  19. Our Approach Look at studies in CEE, CIS and China Select studies that employ fixed effects or IVs to handle the selection/endogeneity problem inherent in privatization => use 14 studies considered by Djankov and Murrell (2002) plus 20 additional ones

  20. Foreign Direct Investors in Transition Economies Focus on effects on level and rate of growth of TFP Profitability Revenues (scale) Other indicators (labor productivity, employment, wages,…) Various measures used in each category => graphical analysis rather than meta-analysis

  21. Foreign Direct Investors in Transition Economies Privatization to foreign owners increase TFP or profitability in CEE and increases or has no effect in CIS

  22. Domestic Owners in Transition Economies In CEE effect of domestic private ownership on TFP is Positive but smaller than that of foreign ownership Greater in later period In CIS the effect is nil or negative Reasons for previous ambiguity in literature is failure to take account endogeneity/selection issues

  23. Effects of Concentration and Employee Ownership on TFP Concentrated (majority) private ownership – mostly positive effects on TFP (driven primarily by foreign ownership) Positive in CEE and Ukraine; negative in Russia 7 studies look at employee (insider) ownership effect on TFP => effects insignificant in 6 and positive in one Found negative in D-M (sensitivity to handling selection bias and recalculations in D-M)

  24. Effect of Private Ownership on TFP Growth in CEE Overall -- small positive or insignificant effect Foreign ownership – insignificant Domestic private ownership – positive or insignificant

  25. Effect of Private Ownership on Level and Growth of Profit Level of profitability Positive or insignificant effect in CEE Insignificant in (one study) in CIS Rate of growth of profitability Insignificant effect in CEE Positive in (one study) in CIS

  26. Effect of Private Ownership on Revenues (Scale) Level of revenues Positive (and especially strong for foreign ownership) effect in CEE Mixed effect in CIS Growth of revenues Small positive effect of foreign ownership and insignificant effect of domestic ownership in CEE Insignificant effect of (undefined) private ownership in CIS

  27. Entreprenerial Ownership Sabirinova et al (2005) find foreign start ups less efficient than existing foreign owned firms, more efficient than domestic start-ups, which are more efficient than existing domestic firms

  28. Entreprenerial Ownership Commander and Svejnar (forthcoming) find domestic start-ups less efficient than foreign owned firms but not different from domestic or state owned firms.

  29. Effects in China Ltd. Number of studies, not very sophisticated methodology Positive significant effect of foreign ownership on TFP Results on effects of domestic nonstate ownership mixed but generally weakly positive for TFP and profitability

  30. Domestic Owners in China Tian and Estrin (2007) -- impact of private ownership is U-shaped Initially ROA decreases as private ownership increases, and then rises Explain by concentration of state ownership and benefits dominant state ownership can bring in China

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

  32. Conclusions 1 Privatization to foreign owners clearly raises performance relative to state ownership, and to domestic private ownership Privatization to new domestic owners also raises performance if institutions are better developed, ie CEE (and China?) relative to Russia (CIS)

  33. Conclusions 2 Reasons for Superior Performance of Foreign Owned Firms Access to top managerial skills and to world markets Domestic ownership sometimes associated with looting, tunnelling, defrauding minority shareholders, reducing performance Privatization process initially prevented domestic ownership concentration; it took time to squeeze out dispersed shareholders

  34. Conclusions 3 Results highlight importance of good management and corporate governance, access to world markets, presence of functioning legal and institutional system for company performance Foreign firms bring in expatriate managers and train local ones

  35. Conclusions 4 Foreign firms‘ 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

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