Can the Growth of Competitive Pressure and Hardening of Budget Constraints Reduce the Efficiency Loss due to State Ownership?

Abstract

This paper studies how market structure and subsidisation affect the productivity gap between state-owned enterprises (SOEs) and private enterprises in the specific context of an economy with a long history of state involvement in industry and continued government intervention after the completion of privatisation. The results suggest that private firms are 7–8 percentage points closer to the sectoral technical frontier and their total factor productivity grows 0.5 points faster than that of SOEs. This difference persists at all levels of competition, while neither ownership type is superior in concentrated markets. When competition levels are more than moderate, SOEs show greater response to further growth of competition than private firms do. High subsidies reduce the productivity advantages of private firms, but harder budget constraints do not make government firms more efficient.