Hans Yeh

Privatization in China:

The Effects of Privatization on Firms’

Price-Cost Margins

Outline

Introduction

Privatization: Literature &

Empirics

China: Timeline of

Privatization

Model & Results

Conclusions and Future

Research

Introduction

State-Owned Enterprises (SOEs) still form the core of

China’s economy:

50% of total employment

Almost 50% of output

2/3 of total assets

More than 2/3 of total liabilities

Privatization is key to modernize China’s economy

Reform with Chinese characteristics:

Gradual and local experimental approach

“Crossing the river by touching the stones”

“摸着石头过河”

Introduction:

Number of SOEs (1970-2006)

120,000

25,000

1997: “Grasping the

large, Releasing the

small”

“抓大放小”

1993:

CCP

initiates

Socialist

Market

Economy

Outline

Introduction

Privatization: Literature &

Empirics

China: Timeline of

Privatization

Model & Results

Conclusions and Future

Research

Problems with

State-Owned Enterprises (SOEs)

State-Owned Firms are Inefficient

Agency Conflict Political Conflict

Ownership gives

special incentives (Vickers and Yarrow, 1988)

Excess employment and

wages (e.g.: Coal mines)

Poor choices of products

and locations (e.g.:

Concorde)

… (Shleifer and Vishny, 1994)

Privatization Theory

This paper focuses on the ownership school

Ownership School Management School

Focus on Ownership:

Separate government

from SOE is key.

Privatization is essential(e.g.: Shleifer and Vishny,

1994)

Improve management

(Incentivize):

Managerial autonomy

Bonus systems(e.g.: Li and Wu, 2002)

Empirical Studies

State-Owned Firms are Inefficient

Time-Series Cross-Sectional

Compares Pre- and Post

privatization firms’

performances (e.g.: La Porta and López-de-

Silanes, 1997)

Compares the

performance of State-

owned enterprises with

private or privatized

firms (e.g.: Konings et al

2005)

Outline

Introduction

Privatization: Literature &

Empirics

China: Timeline of

Privatization

Model & Results

Conclusions and Future

Research

October 1949

Founding of

the People’s

Republic of

China (PRC)

China Follows the

Soviet Model of

Nationalization due to

the apparent success

to industrialize

September 1976

Chairman Mao

Zedong dies

1978: Reform and

Open Door Policy

(Deng Xiao Ping)

1997: SOE Crisis

Chinese government

launches policy of

“Grasping the Large,

Releasing the Small”

1993: China switches

to a de facto market

economy

Number of State-

Owned enterprises

dropped from 120,000

in mid 1990s to

25,000 in 2006 Future:

Mass privatization

programs still have

to take place

1976-1978:

Internal Power Struggle

Timeline of China

Outline

Introduction

Privatization: Literature &

Empirics

China: Timeline of

Privatization

Model & Results

Conclusions and Future

Research

Main Findings

Privatization has a positive impact on firms’ PCMs1

The positive impact is highest for Foreign and

Hong Kong, Macao and Taiwanese enterprises2

PCMs are lower in highly competitive markets

compared to less competitive markets3

Price-Cost Margins

Usually the literature focuses on performance measurements, e.g.:

Profit, Productivity, Employee lay-off, etc (Bai et al, 1997; Zhang et

al, 2001; Li and Wu 2002)

This paper investigates the effects on firm behavior

Price-Cost Margins (PCMs) / Markups/ Lerner Index

Problem: Marginal Costs are unobservable

it itit

it

p cPCM

p

it it it it it itit

it it it

p q c q p cSales CostsPCM

Sales p q p

Data Description

Firm-level panel data (financial statements)

More than 100,000 Chinese firms

Drop observation if:

– Misses values for sales, costs, tangible and intangible assets

– Non-manufacturing firms

– Regions and industries with fewer than 20 firms

89,721 firms in 22 manufacturing industries over the years

2003 to 2006

Types of Legal Entities

Branch Company

China & Foreign Cooperation Management

China & Foreign Joint Venture Managemen

Collective Joint Ownership Enterprise

Collective-owned

Collectively-Owned Enterprise

Cooperative Management (Hongkong,Macao

Exclusive State-Funded Company

Foreign Invested Stock Limited Company

Foreign Investment

Foreign Investment Share Holding

HK, Macau or Taiwan Joint Cooperative V

HK, Macau or Taiwan Joint Venture

HK, Macau or Taiwan-Funded Enterprise

Investment Share Holding (Hongkong,Maca

Joint State-Collective Enterprise

Joint Venture Management (Hongkong,Maca

Joint-stock company

Jointly Collective-owned

Jointly State-owned

Jointly-Owned Enterprise

Limited Company

Not classified

Other Enterprise

Other Enterprises

Other Joint Owned company

Other Joint Ownership Enterprise

Other Limited Liabilities

Other Limited Liability Company

Private Cooperative Enterprise

Private Limited Company

Private Limited Liabilities

Private Partnership

Private Share Holding

Private Sole Investment

Private Stock Limited Company

Process Company, Not Legal Entity

Share Co-operation

Sino-Foreign Cooperative Venture

Sino-Foreign Joint Venture

Sole Investment (Hongkong,Macao and Tai

Sole State company

State Joint Ownership Enterprise

State-Owned Enterprises

State-owned

State-owned and Collective Cooperation

Stock Cooperative Enterprise

Stock Limited Company

Wholly Foreign Owned Enterprise

Wholly HK, Macau or Taiwan Invested Sto

Wholly HK, Macau or Taiwan Owned Enterp

Wholly Privately Owned Enterprise

Fixed Effects Model

Privately owned enterprise (domestic),

Foreign owned enterprise,

Hong Kong, Macao or Taiwanese enterprise,

Collectively-owned enterprise,

Domestic Joint-Venture;

if all dummies are 0, the particular firm is state-owned

C4-index of concentration in sector j at time t: measure of domestic

competition

Tangible fixed assets: market entry barriers

Unobservable firm-level fixed effect: sunk costs, quality of manager, etc

itHMT

itCOE

itDJV

jtCON

itTAN

i

itPOE

it it it it it it jt it i itPCM POE FOE HMT COE DJV CON TAN

itFOE

Regression Results for China,

Eastern China and Western China

CHINA Panel

Price-Cost Margin .0795244**

(.0070025)

Private (Domestic) .0004755

(.004636)

Foreign Enterprises .0105914

(.0068611)

HK, Macao & Taiwan .0169595**

(.0068938)

Collective Enterprises .0124891**

(.0029587)

Domestic JVs -.0004525

(.0066292)

C4-Index .0000274

(.0000225)

Tangible Fixed Assets .0030476**

(.0006125)

Year Dummies Yes

# observations 178.406

WESTERN CHINA Panel

Price-Cost Margin .1089214**

(.0309204)

Private (Domestic) -.0051572

(.0141416)

Foreign Enterprises -.0269522

(.0454797)

HK, Macao & Taiwan -.0326468

(.0377145)

Collective Enterprises .0157447**

(.0064955)

Domestic JVs -.0149258

(.0189903)

C4-Index .0001402**

(.0000697)

Tangible Fixed Assets .0007166

(.0029086)

Year Dummies Yes

# observations 13.893

EASTERN CHINA Panel

Price-Cost Margin .0705933**

(.0076705)

Private (Domestic) -.0028836

(.005339)

Foreign Enterprises .0144414**

(.0072341)

HK, Macao & Taiwan .0220378**

(.0073764)

Collective Enterprises .0057725*

(.0035073)

Domestic JVs -.0045104

(.0074605)

C4-Index .0000353

(.0000279)

Tangible Fixed Assets .0034515**

(.0006585)

Year Dummies Yes

# observations 141.361

Disentangle effect on PCM

+

–

– +

Cost-

decreasing

behavior

Price-

increasing

behavior

Price-

decreasing

behavior

Cost-

Increasing

behavior

it itit

it

p cPCM

p

Disentangle effect on PCM

Competitive Sample

Firms are price-takers PCM increase suggests cost-

reducing behavior

PCM decrease suggests

cost-increasing behavior

C4-Index < 5%

Results remain robust for a

cut-off value of 10%

Non-Competitive Sample

C4-Index > 5%

Eastern China

HIGHLY COMPETITIVE LOWLY COMPETITIVE

EASTERN Panel OLS2003 OLS2004 Panel OLS2003 OLS2004

PCM .092519** .0917023** .1212727** .1182967** .1074578** .1415783**

(.0078593) (.0032812) (.0064229) (.0060698) (.0036546) (.0063089)

Private (Dom.) .0047053 -.0036178 -.0115866 -.0040721 -.0020631 -.000438

(.0102416) (.0038878) (.0066791) (.0065998) (.0043976) (.0068768)

Foreign Firms .0086629 .0056064 .022412** .016227 .0404656** .013921*

(.0135451) (.0054718) (.0077533) (.0098328) (.0075175) (.008024)

HM&T .0262275** .0050857 .0020418 .0226678** -.0004697 -.0011467

(.0132207) (.0047417) (.0075313) (.0105216) (.0059259) (.0082496)

COE -.0001874 .0050005 .0022294 .0138201** .0744544** .0302757*

(.003287) (.0127152) (.0119032) (.006299) (.0223398) (.0164837)

DJV .0117156 .0245869 .0479497** -.0065205 .0571633** .0457012**

(.0126848) (.0240049) (.013403) (.008916) (.0225609) (.0147173)

Year Dummies Yes No No Yes No No

# observations 56.545 2.494 5.510 75.596 2.729 4.427

Western China

HIGHLY COMPETITIVE LOWLY COMPETITIVE

WESTERN Panel OLS2003 OLS2004 Panel OLS2003 OLS2004

PCM .0710869** .0962654** .1387376** .1521199** .1245956** .1797218**

(.0340395) (.0148689) (.0176692) (.0095492) (.0108615) (.0126337)

Private (Dom.) .0334765 .018271 -.0064231 -.017688 -.0079326 -.0081924

(.0400985) (.0182482) (.0192695) (.0122432) (.0133616) (.0155256)

Foreign Firms .022599 .118131** .0243594 -.0943837 .0475904 .0126476

(.0805179) (.0603596) (.0279218) (.0276726) (.0417557) (.0302009)

HM&T .0041402 -.0948351 -.0082397 -.0565748 -.013394 .0255035

(.0658283) (.0850367) (.0411619) (.0272629) (.0192626) (.0480958)

COE .0070294 .066709** .0136244 .0104647 -.0371098 -.0346577

(.0124003) (.0341242) (.0431841) (.0109849) (.034961) (.0471642)

DJV .0277851 .0344061 .023612 -.0127448 .0299832 .0538518

(.0422239) (.028369) (.0313615) (.0229772) (.0296858) (.0477382)

Year Dummies Yes No No Yes No No

# observations 6.103 340 520 6.758 484 566

Effects on Price-Cost Margins

+ +/- -

Foreign Owned

HK, Macau and Taiwan

Collectively Owned

C4-index

(Domowitz et al, 1988)

Tangible Fixed Asset

Privately Owned

Domestic Joint Venture

it it it it it it jt it i itPCM POE FOE HMT COE DJV CON TAN

Outline

Introduction

Privatization: Literature &

Empirics

China: Timeline of

Privatization

Model & Results

Conclusions and Future

Research

Conclusion

Privatization has a positive impact on firms’ PCMs

The positive impact is highest for Foreign and

Hong Kong, Macao and Taiwanese enterprises

PCMs are lower in highly competitive markets

compared to less competitive markets

1

2

3

China followed a unique path of reforms:

gradual and local experimental

Future Research

Central and Northeastern China

International Competitive Pressure (e.g.: Import

Penetration)

Long-Run Analysis (Innovation, Product

Quality,…)

1

2

3

Q&A

Thank you for your attention!

Acknowledgements:

Prof. Dr. J. Konings, Supervisor

Tim Goesaert, PhD Candidate

Prof. Dr. Changqi Wu

Jenny Chen, Alexander Vuylsteke, Dries Manshoven and

Pieterjan Vanbuggenhout

Extra 1: C4-Index

Industry concentration based on the sales volume of the four

largest firms of every sector (NACE)

0 < C4-index < 1

Perfect comp Monopoly

Independent variable: Control for domestic competition

*Sector: Two-digit NACE level of industrial classification

NACE = Nomenclature statistiques des Activités Economiques dans les Communauté Européenne

Extra Slide 2:% of Firms with Different Types of Ownership

Based on No. Firms

Based on Sales

Ownership Central Eastern Northeast Western China

Domestic Private 55.60 39.78 48.98 57.20 42.78

Foreign Enterprises 11.12 33.58 18.46 7.40 29.18

HK, Macao, Taiwanese 4.39 15.30 3.72 2.09 12.80

Collective Enterprises 0.12 0.43 0.21 1.10 0.44

Dom. Joint Ventures 1.15 0.41 1.48 2.85 0.71

State Owned Enterprises 27.60 10.47 27.13 29.35 14.08

Total 100.00 100.00 100.00 100.00 100.00

Ownership Central Eastern Northeast Western China

Domestic Private 65.85 50.70 51.88 60.75 53.88

Foreign Enterprises 4.09 19.38 17.40 11.16 16.52

HK, Macao, Taiwanese 4.18 21.26 5.55 4.18 15.93

Collective Enterprises 0.26 0.50 0.83 1.10 0.60

Dom. Joint Ventures 0.74 0.28 0.53 0.75 0.42

State Owned Enterprises 24.89 7.88 23.81 22.06 12.66

Total 100.00 100.00 100.00 100.00 100.00

Extra Slide 3:

% of Firms in Different Sectors

Nace2 Central Eastern Northeast Western China

15 Food and Beverages 12.06 6.33 14.07 11.73 11.05

16 Tobacco 0.4 0.08 0.32 0.87 0.42

17 Textiles 11.01 11.87 5.05 6.18 8.53

18 Wearing apparel; fur 3.22 10.07 6.2 1.12 5.15

19 Leather, luggage, and footwear 1.54 4.81 0.54 1.64 2.13

20 Wood, straw, and plaiting materials 1.95 1.4 4.07 0.82 2.06

21 Pulp, paper, and paper products 3.62 2.21 1.59 2.82 2.56

22 Publishing, printing, and media 1.43 1.23 0.86 1.73 1.32

23 Coke, ref. petroleum products, nucl. Fuel 1.41 0.9 2.66 2.05 1.76

24 Chemicals and chemical products 13.38 6.89 10.15 14.14 11.14

25 Rubber and plastic products 2.66 4.81 3.88 3.06 3.6

26 Other nonmetallic mineral products 13.74 6.11 8.65 13.96 10.61

27 Basic metals 6.46 3.95 7.64 9.24 6.82

28 Fabricated metal products 3.4 5.6 3.87 3.4 4.07

29 Machinery and equipment n.e.c. 8.43 8.84 10.33 8.59 9.05

30 Office machinery and computers 0.14 1.03 0.42 0.05 0.41

31 Electrical machinery and apparatus n.e.c. 3.82 5.41 3.92 3.15 4.08

32 Radio, TV, and communication equipment 1.64 6.78 2.93 2.96 3.58

33 Medical, precision, and optical instruments 1.55 2.12 1.31 2.02 1.75

34 Motor vehicles, trailers, and semitrailers 3.9 2.46 5.76 3.51 3.91

35 Other transport equipment 2.09 1.66 2.97 5.8 3.13

36 Furniture, manufacturing n.e.c. 2.14 5.43 2.79 1.16 2.88

Total 100.00 100.00 100.00 100.00 100.00