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

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

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

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

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

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

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

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

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

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

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)

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

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

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

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)

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

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

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

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.

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.