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The Park Place Economist

Abstract

State-owned enterprises (SOEs) are often claimed to be less profitable and less efficient compared to private corporations. According to Grout and Stevens (2003), SOEs were associated with different types of market failure and were mostly used to attain non-economic goals such as unemployment level reduction, control over natural resources, and political stability. Shirley and Walsh (2000), who surveyed 52 studies on the difference in performance between SOEs and private corporations, discovered that there were only five studies indicating that SOEs outperformed private corporations. However, these studies only monitored the firms in the monopolistic utility sectors. Similar situations occurred in most of the previous studies that researched correlation between performance and firm ownership. Many of them either focused heavily on industries with monopoly/oligopoly characteristics or industries with output that could not be priced by competitive forces. As a result, it was difficult to distinguish the effects of market regulations and conditions on the types of firm ownership. Since there is a correlation between competition and performance, controlling for the market structure is crucial to the proper investigation of performance across different types of ownership (Goldeng, Grunfeld, & Benito, 2008). Since my research is focusing on the difference in performance between SOEs and private corporations within a competitive environment, it contributes to the very few studies that controlled for the market structure. My main research question is whether private corporations perform better compared to SOEs in terms of profitability and efficiency in the strategic sectors in a competitive environment. My hypothesis is that due to the soft-budget constraint behavior and policy burdens imposed by the state, SOEs are less efficient and have lower profitability compared to private corporations.

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