<p>SOE's don't have to perform worse that private enterprises, but they often do.  The reasons are manifold:</p>

<ul>
<li><p>Some SOE's are not set up for profit motive, but rather to seed strategic industries for a nation (e.g. Port of Singapore, or Huawei Telecom).</p></li>
<li><p>Frequently, state influence at market-oriented is counterproductive because politicians placed in leadership positions are not good business managers (different skillsets), and political contacts can have a detrimental effect on competitiveness (overreliance on government contracts, etc).</p></li>
<li><p>Even if the SOE is run by market-selected managers and employees, states often have different shareholder incentives and objectives as <em>owners</em>, so they may not exercise market-driven ownership which leads private firms to attempt maximizing equity value and earnings.</p></li>
</ul>

<p>Note that it's not true that SOE's are not funded directly by government.  Many SOE's receive partial funding through government, and many others receive heavily subsidized contracts from governments.</p>

<p>There is quite a lot of research on SOE performance.  Do a search.  For example, McKinsey did a study on Chinese SOE's and concluded that on average they deliver less than half the return on assets as their public counterparts:</p>

<p><a href="http://www.forbes.com/2004/11/04/cx_1104mckinseychina6.html">http://www.forbes.com/2004/11/04/cx_1104mckinseychina6.html</a></p>

CC BY-SA 3.0
2015-02-18T05:37:03.280Z
2015-02-18T05:37:03.280Z
tohster
<p>In contract theory, economists such as Oliver Hart have argued that ownership of a firm would not matter if complete contracts could be written. For example, the incentives to reduce costs that the manager of a private firm has could simply be replicated in a state-owned firm with the help of suitable incentive contracts.</p>
<p>Yet, in reality contracts are incomplete. In this case, ownership can matter. The leading application of the incomplete contracting paradigm to the issue of privatization is Hart, Shleifer, and Vishny (1997). They argue that under private ownership, incentives to reduce costs may be too strong, while under public ownership, incentives to reduce costs may be too weak. Their work has been extended by several authors. For instance, Hoppe and Schmitz (2010) allow for hybrid ownership structures, Francesconi and Muthoo (2011) allow for impure public goods. See also Walker (2016) for a survey of this branch of the contract-theoretic literature.</p>
<p><a href="https://doi.org/10.1162/003355300555448" rel="nofollow noreferrer">Hart, O., Shleifer, A. and Vishny, R.W. (1997). The proper scope of government: Theory and an application to prisons. Quarterly Journal of Economics, 112(4), 1127-1161.</a></p>
<p><a href="https://doi.org/10.1111/j.1542-4774.2011.01017.x" rel="nofollow noreferrer">Francesconi, M. and Muthoo, A. (2011). Control rights in complex partnerships. Journal of the European Economic Association, 9(3), 551-589.</a></p>
<p><a href="https://doi.org/10.1016/j.jpubeco.2009.11.009" rel="nofollow noreferrer">Hoppe, E.I. and Schmitz, P.W. (2010). Public versus private ownership: Quantity contracts and the allocation of investment tasks. Journal of Public Economics, 94(3-4), 258-268.</a></p>
<p><a href="https://doi.org/10.1080/00779954.2015.1059876" rel="nofollow noreferrer">Walker, P. (2016). From complete to incomplete (contracts): A survey of the mainstream approach to the theory of privatisation. New Zealand Economic Papers, 50(2), 212-229.</a></p>

CC BY-SA 4.0
2022-03-19T16:48:26.213Z
2022-03-19T16:48:26.213Z
mfr2011
<p>I agree to the assumption that soe are inefficient. In most cases these firms leaders are not business people but a chance created for one to be paid. The point that the managers did not invest even a single cent, breeds the I don't care attitude provided Iam paid. Lack of monitoring gives room to employees to be truent. This practice will have negative impact on production of the firm. </p>

CC BY-SA 3.0
2017-03-28T20:01:53.563Z
2017-03-28T20:01:53.563Z
Sylvester Nkomba Mabuta
<p>Because of the large number of roughly comparably sized private and public firms, the petroleum industry provides a laboratory for exploring differences between private and state owned enterprises in related businesses. Without passing judgement on if it <em>has</em> to be that way,  it appears as though the private firms are vastly more efficient:</p>

<p><a href="http://www.tandfonline.com/doi/abs/10.1080/00036849200000122" rel="noreferrer">Efficiency differences between private and state-owned enterprises in the international petroleum industry</a> (1992)</p>

<blockquote>
  <p>Technical (managerial), scale and allocative efficiency differences
  between private and state owned firms in the international petroleum
  industry are estimated. The estimation of Aigner-Chu deterministic
  frontiers, maximum likelihood stochastic frontiers, and maximum
  likelihood Gamma frontiers make this analysis the most complete and
  sophisticated testing of property rights theory available. The
  empirical findings suggest ceteris paribus, that <strong>state firms could
  satisfy the demand for their output with something less than half of
  their current resource inputs simply by being converted to private,
  for profit enterprises.</strong></p>
</blockquote>

<p>Of course, that last claim depends on the costs of privatization and asserting those efficiency gains can actually be realized in the sorts of places where oil firms are state owned.   </p>

<p><a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1994.tb05147.x/abstract" rel="noreferrer">The Financial and Operating Performance of Newly Privatized Firms: An International Empirical Analysis</a> (1994)</p>

<blockquote>
  <p>This study compares the pre- and postprivatization financial and
  operating performance of 61 companies from 18 countries and 32
  industries that experience full or partial privatization through
  public share offerings during the period 1961 to 1990. Our results
  document strong performance improvements, achieved surprisingly
  without sacrificing employment security. <strong>Specifically, after being
  privatized, firms increase real sales, become more profitable,
  increase their capital investment spending, improve their operating
  efficiency, and increase their work forces.</strong> Furthermore, these
  companies significantly lower their debt levels and increase dividend
  payout. Finally, we document significant changes in the size and
  composition of corporate boards of directors after privatization.</p>
</blockquote>

<p>Some evidence from a broader array of industries:</p>

<p><a href="http://www.jstor.org/stable/725378?seq=1#page_scan_tab_contents" rel="noreferrer">Ownership and Performance in Competitive Environments: A Comparison of the Performance
of Private, Mixed, and State-Owned Enterprises</a> (1989)</p>

<blockquote>
  <p>The coefficients for MEs [Mixed Ownership Enterprises] and SOEs [State Owned Enterprises] are negative and statistically
  significant at the .05 level for a one-sided alternative in all
  equations, which indicate that, on average, MEs and SOEs are
  significantly less profitable and less efficient than PCs [Private Corporations] after
  controlling for the factors described above. <strong>On average, SOEs have a
  return on equity of almost 12 percent less than PCs ; they have a
  return on assets and a return on sales that are about 2 percent less
  than PCs, and their net incomes are \$66 million less than PCs.</strong> MEs
  perform worse: their return on equity is more than 12 percent less
  than PCs, their return on assets and return on sales are about 3.5
  percent less than PCs, and their net income is \$165 million less than
  that of PCs. In terms of sales per asset, both SOEs and MEs fare
  equally poorly relative to PCs; but in terms of sales per employee,
  SOEs are less efficient than MEs.</p>
</blockquote>

<p>A more recent result:</p>

<p><a href="http://www.jstor.org/stable/2677913?seq=1#page_scan_tab_contents" rel="noreferrer">State-Owned and Privately Owned Firms: An Empirical Analysis of Profitability, Leverage, and Labor Intensity</a> (2001)</p>

<blockquote>
  <p>The results of the comparison <strong>strongly support the proposition that
  government firms display inferior profitability</strong>. ... We test an implication
  of the Boycko et al. (1996) model that government firms will tend to
  <strong>use more labor than their private counterparts</strong>. Cross-sectional
  comparisons support the model</p>
</blockquote>

CC BY-SA 3.0
2015-02-18T12:23:48.400Z
2015-02-18T14:04:34.947Z
2015-02-18T14:04:34.947Z
BKay
<p>The typical right wing/free market argument, that leads to privatisation of government assets is that the government assets will be far more efficiently managed when in the hands of profit seeking capitalists, rather than being owned by the government. </p>

<p>Certainly it's fair to say that government departments are inefficient - a department that is <em>directly funded</em> by the government can't go bankrupt, so long as the government keeps funding it. </p>

<p>However, for a SOE the company still needs to stand on its own right, the SOE doesn't receive funding directly from the government. </p>

<p>The SOEs management structure is exactly the same as a privately owned company, except that the government is choosing who the board of directors is. </p>

<p>So the question is, unless the government is electing a board of directors that have different priorities to profit seeking capitalists, how is it that a SOE would be less efficient than a privately owned company?</p>

<p>Is there any research showing that SOEs are less profitable than privately owned companies? </p>

CC BY-SA 3.0
2017-03-31T19:00:21.713Z
An interesting question is that functionally why would the government need to nationalize a private company if not to reduce its efficiency? The only role the government takes is to eliminate negative externalities and promote positive externalities which when not being considered will be inefficient behavior.
TheSaint321
CC BY-SA 3.0
2015-02-17T21:37:40.500Z
can someone please create `state-owned-enterprises` and `privatisation` tags?
dwjohnston
CC BY-SA 3.0
2015-02-17T21:50:19.903Z
Feel like the tags you proposed a little bit of narrow-scoped. How about tags like "governance" and "political economy"? Also feel like you might take an interest in Shleifer and Vishny's book the grabbing hand.
Metta World Peace
CC BY-SA 3.0
2015-02-19T22:42:34.047Z
See also: [*Is there any evidence that public transport splitting, corporatisation or privitisation affects quality?*](http://politics.stackexchange.com/q/309/130)
gerrit
<government><political-economy>
Are state owned enterprises really inefficient?
dwjohnston
# Are state owned enterprises really inefficient?

(Asked by: username_0 on 2015-02-17)

The typical right wing/free market argument, that leads to privatisation of government assets is that the government assets will be far more efficiently managed when in the hands of profit seeking capitalists, rather than being owned by the government.

Certainly it's fair to say that government departments are inefficient - a department that is *directly funded* by the government can't go bankrupt, so long as the government keeps funding it.

However, for a SOE the company still needs to stand on its own right, the SOE doesn't receive funding directly from the government.

The SOEs management structure is exactly the same as a privately owned company, except that the government is choosing who the board of directors is.

So the question is, unless the government is electing a board of directors that have different priorities to profit seeking capitalists, how is it that a SOE would be less efficient than a privately owned company?

Is there any research showing that SOEs are less profitable than privately owned companies?

**Tags:** government, political-economy

> **Comments:**
> **username_0**: can someone please create `state-owned-enterprises` and `privatisation` tags?  
> **username_2**: Feel like the tags you proposed a little bit of narrow-scoped. How about tags like "governance" and "political economy"? Also feel like you might take an interest in Shleifer and Vishny's book the grabbing hand.  
> **username_3**: See also: [*Is there any evidence that public transport splitting, corporatisation or privitisation affects quality?*](http://politics.stackexchange.com/q/309/130)  
> **username_1**: An interesting question is that functionally why would the government need to nationalize a private company if not to reduce its efficiency? The only role the government takes is to eliminate negative externalities and promote positive externalities which when not being considered will be inefficient behavior.  

---

## 4 answers

### Answer by username_7 on 2015-02-18. Score: 7 | Accepted answer

Because of the large number of roughly comparably sized private and public firms, the petroleum industry provides a laboratory for exploring differences between private and state owned enterprises in related businesses. Without passing judgement on if it *has* to be that way, it appears as though the private firms are vastly more efficient:

[Efficiency differences between private and state-owned enterprises in the international petroleum industry](http://www.tandfonline.com/doi/abs/10.1080/00036849200000122) (1992)

> Technical (managerial), scale and allocative efficiency differences
> between private and state owned firms in the international petroleum
> industry are estimated. The estimation of Aigner-Chu deterministic
> frontiers, maximum likelihood stochastic frontiers, and maximum
> likelihood Gamma frontiers make this analysis the most complete and
> sophisticated testing of property rights theory available. The
> empirical findings suggest ceteris paribus, that **state firms could
> satisfy the demand for their output with something less than half of
> their current resource inputs simply by being converted to private,
> for profit enterprises.**

Of course, that last claim depends on the costs of privatization and asserting those efficiency gains can actually be realized in the sorts of places where oil firms are state owned.

[The Financial and Operating Performance of Newly Privatized Firms: An International Empirical Analysis](http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1994.tb05147.x/abstract) (1994)

> This study compares the pre- and postprivatization financial and
> operating performance of 61 companies from 18 countries and 32
> industries that experience full or partial privatization through
> public share offerings during the period 1961 to 1990. Our results
> document strong performance improvements, achieved surprisingly
> without sacrificing employment security. **Specifically, after being
> privatized, firms increase real sales, become more profitable,
> increase their capital investment spending, improve their operating
> efficiency, and increase their work forces.** Furthermore, these
> companies significantly lower their debt levels and increase dividend
> payout. Finally, we document significant changes in the size and
> composition of corporate boards of directors after privatization.

Some evidence from a broader array of industries:

[Ownership and Performance in Competitive Environments: A Comparison of the Performance
of Private, Mixed, and State-Owned Enterprises](http://www.jstor.org/stable/725378?seq=1#page_scan_tab_contents) (1989)

> The coefficients for MEs [Mixed Ownership Enterprises] and SOEs [State Owned Enterprises] are negative and statistically
> significant at the .05 level for a one-sided alternative in all
> equations, which indicate that, on average, MEs and SOEs are
> significantly less profitable and less efficient than PCs [Private Corporations] after
> controlling for the factors described above. **On average, SOEs have a
> return on equity of almost 12 percent less than PCs ; they have a
> return on assets and a return on sales that are about 2 percent less
> than PCs, and their net incomes are \$66 million less than PCs.** MEs
> perform worse: their return on equity is more than 12 percent less
> than PCs, their return on assets and return on sales are about 3.5
> percent less than PCs, and their net income is \$165 million less than
> that of PCs. In terms of sales per asset, both SOEs and MEs fare
> equally poorly relative to PCs; but in terms of sales per employee,
> SOEs are less efficient than MEs.

A more recent result:

[State-Owned and Privately Owned Firms: An Empirical Analysis of Profitability, Leverage, and Labor Intensity](http://www.jstor.org/stable/2677913?seq=1#page_scan_tab_contents) (2001)

> The results of the comparison **strongly support the proposition that
> government firms display inferior profitability**. ... We test an implication
> of the Boycko et al. (1996) model that government firms will tend to
> **use more labor than their private counterparts**. Cross-sectional
> comparisons support the model


---

### Answer by username_4 on 2015-02-18. Score: 7

SOE's don't have to perform worse that private enterprises, but they often do. The reasons are manifold:

* Some SOE's are not set up for profit motive, but rather to seed strategic industries for a nation (e.g. Port of Singapore, or Huawei Telecom).
* Frequently, state influence at market-oriented is counterproductive because politicians placed in leadership positions are not good business managers (different skillsets), and political contacts can have a detrimental effect on competitiveness (overreliance on government contracts, etc).
* Even if the SOE is run by market-selected managers and employees, states often have different shareholder incentives and objectives as *owners*, so they may not exercise market-driven ownership which leads private firms to attempt maximizing equity value and earnings.

Note that it's not true that SOE's are not funded directly by government. Many SOE's receive partial funding through government, and many others receive heavily subsidized contracts from governments.

There is quite a lot of research on SOE performance. Do a search. For example, McKinsey did a study on Chinese SOE's and concluded that on average they deliver less than half the return on assets as their public counterparts:

<http://www.forbes.com/2004/11/04/cx_1104mckinseychina6.html>


---

### Answer by username_5 on 2022-03-19. Score: 2

In contract theory, economists such as Oliver Hart have argued that ownership of a firm would not matter if complete contracts could be written. For example, the incentives to reduce costs that the manager of a private firm has could simply be replicated in a state-owned firm with the help of suitable incentive contracts.

Yet, in reality contracts are incomplete. In this case, ownership can matter. The leading application of the incomplete contracting paradigm to the issue of privatization is Hart, Shleifer, and Vishny (1997). They argue that under private ownership, incentives to reduce costs may be too strong, while under public ownership, incentives to reduce costs may be too weak. Their work has been extended by several authors. For instance, Hoppe and Schmitz (2010) allow for hybrid ownership structures, Francesconi and Muthoo (2011) allow for impure public goods. See also Walker (2016) for a survey of this branch of the contract-theoretic literature.

[Hart, O., Shleifer, A. and Vishny, R.W. (1997). The proper scope of government: Theory and an application to prisons. Quarterly Journal of Economics, 112(4), 1127-1161.](https://doi.org/10.1162/003355300555448)

[Francesconi, M. and Muthoo, A. (2011). Control rights in complex partnerships. Journal of the European Economic Association, 9(3), 551-589.](https://doi.org/10.1111/j.1542-4774.2011.01017.x)

[Hoppe, E.I. and Schmitz, P.W. (2010). Public versus private ownership: Quantity contracts and the allocation of investment tasks. Journal of Public Economics, 94(3-4), 258-268.](https://doi.org/10.1016/j.jpubeco.2009.11.009)

[Walker, P. (2016). From complete to incomplete (contracts): A survey of the mainstream approach to the theory of privatisation. New Zealand Economic Papers, 50(2), 212-229.](https://doi.org/10.1080/00779954.2015.1059876)


---

### Answer by username_6 on 2017-03-28. Score: 0

I agree to the assumption that soe are inefficient. In most cases these firms leaders are not business people but a chance created for one to be paid. The point that the managers did not invest even a single cent, breeds the I don't care attitude provided Iam paid. Lack of monitoring gives room to employees to be truent. This practice will have negative impact on production of the firm.


---

