How Does Government Ownership Affect Firm Performance? Evidence from China’s Privatization Experience

Abstract

The effect of government ownership on firm performance remains a controversial issue, especially in a transitional economy like China. Government ownership is typically viewed as adversely affecting firm performance. This study of that of Mainland China’s privatization experience indicates the opposite. No matter whether it is in the form of state ownership or legal person ownership, government ownership has a positive impact on partially privatized state‐owned enterprises. However, this relationship is nonlinear and shows an inverted U‐shape. Given the situation of highly indebted, non‐performing state‐owned enterprises, we argue that too much government control is indeed bad for enterprises. But too little government ownership may not be good either. It might mean a lack of the government’s political support and business connections, which are valuable and necessary to vitalize performance.