The Theory of State‐owned Enterprises in Market Economies

Abstract

Four topics are covered: the circumstances under which state-owned enterprises (SOEs) are more effective than private firms; the different approaches to modelling public and private firms; the performance of SOEs; and strategies including privatization to limit their more damaging effects. It is argued that ideological or development motives are important in their genesis, but that if efficiency and innovation are key considerations the normative case for their existence is more doubtful. Various types of SOE model are identified, deriving from the variety of circumstances in which they operate, and the theoretical perspective of the modeller. These include the property rights school, the public choice tradition, neoclassical, behavioural and budget maximizing approaches. All models assume the existence of monitoring problems, created by informational asymmetry. The consequences can include high non-pecuniary benefits for managers, a concentration on monitored activities, and lower innovation levels and efficiency than private firms. Curiously this is not necessarily reflected in higher prices or costs. Possible remedial strategies include a change of ownership, a change of objectives, the introduction of incentivecompatible payment schemes, improved performance indicators and privatization.

Governments as owners: State-owned multinational companies

“…When markets are unable to efficiently allocate products or resources to the most welfare-enhancing use, government officials are compelled to intervene to address these inefficiencies using an array of instruments such as taxation, regulation or direct ownership; the latter instrument results in the creation of SOEs (see Levy, 1987;Lindsay, 1976; and a review in Lawson, 1994). Market failures can take several forms: public goods, in which the rival and nonexcludable nature of their consumption will result in their depletion; positive externalities, in which the providers of the externalities are not compensated for this effect and thus will underprovide them to society; negative externalities, in which the generators of the externalities do not have to pay for these effects and thus will overprovide them to society; information asymmetries, which result in moral hazard and adverse selection problems; incomplete markets, in which consumers cannot obtain the products even if they are willing to pay their price; and natural monopolies, in which it is more efficient for society to have one provider than to have competition among several firms, and thus there is the danger of undersupply or overpricing.…”

Pro‐market reforms and developing country multinational corporations

“…State firms are also less likely to take advantage of opportunities for international expansion that result from reforms because they often have multiple goals that may be in conflict with each other (Boycko, Shleifer, and Vishny, 1996; Lawson, 1994; Vickers and Yarrow, 1988). Whereas private firms are typically focused on growth, market share, and profitability, state firms often focus on providing employment and satisfying social needs regardless of whether they are in the best interest of the firm.…”

Structural Reform and Firm Exports

“…In contrast to subsidiaries of foreign firms and domestic private firms, which tend to have value-creation as their main goal, domestic state-owned companies tend to have multiple goals, some of which create conflicts (see the review of state-owned firms in Lawson 1994). Domestic state-owned firms are nominally owned by the citizenry, but controlled and run by politicians (or managers appointed by politicians).…”