Privatization and Performance: The Experience of Firms in China

Wai-Ming Fong and Kevin C.K. Lam

Chinese Economy, 2004, vol. 37, issue 4, 5-27

Abstract: This article investigates the effects of privatization on corporate performance in China. We focus on two very different industries: the manufacturing industry--the largest (relatively) competitive industry in China--and the basic material industry--the largest industry protected and closely monitored by the central government. We find that privatization to the domestic public has only a small positive effect on corporate performance for the manufacturing industry, but does not have any effect for the basic material industry, suggesting that privatization does not work when competition does not prevail. We also find that privatization to institutions hurts corporate performance for the manufacturing industry, but not for the basic material industry, suggesting that control by legal person shares often means additional layers of bureaucracy and higher agency costs, unless the central government closely monitors the firms, mitigating the agency problems.

Date: 2004
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