Working Paper: CEPR ID: DP10331
Authors: Jie Gan Yan Guo; Chenggang Xu
Abstract: A distinct feature of China?s privatization is that both its design and its implementation are highly decentralized and are administered by the local governments. Based on a survey of 3,000 firms in over 100 Chinese cities, this paper studies how city governments choose among various privatization methods, how these different methods transfer control rights from the government to private owners, and how various privatization methods lead to different restructuring and performance. Our data indicate that although privatization in China has made substantial progress in reallocating control rights from the government to private owners, the degree of remaining government influence in corporate decisions across different privatization methods varies significantly. More importantly, political and fiscal constraints critically determine city governments? decisions on how to privatize. Cities with less political opposition to labor shedding and where the government has stronger fiscal capacity tend to choose direct sales to insiders (MBOs) as the privatization method, which transfers control rights to private owners most completely. As a result, MBO firms restructure most effectively and achieve the greatest performance improvement.
Keywords: Privatization; Control Rights; China; Management Buyouts; Political Economy
JEL Codes: D22; D23; H19; L29; P31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Privatization method (MBO) (L33) | Decrease in government control (H19) |
| Decrease in government control (H19) | Improvement in firm performance (L25) |
| Privatization method (MBO) (L33) | Improvement in firm performance (L25) |
| Privatization method (Other methods) (L33) | No significant performance improvements (D29) |