The Effects of Privatization on Firm Productivity in China

Abstract

We study the productivity effects of the world’s largest privatization program in China. Relying on a matching and difference-in-difference procedure, we find that privatizations robustly led to large productivity gains. Privatizations improved TFP by 13 to 15 percent, and this estimate is at the high-end of the estimates obtained from other transitional countries. Further evidence suggests that productivity gains came from improvement in management quality. The positive effect of privatization on TFP was more pronounced among firms in more competitive industries, suggesting complementarity between competition and privatizations. Privatizations worked less well for “commanding-heights” SOEs under the oversight of the central government. Our evidence suggests that the privatization program in China was a key factor behind China’s growth in the past decades.