What Causes Privatization? Evidence from Import Competition

This paper identifies product market competition as a fundamental impetus for privatization. Based on the economy with the largest state sector and shocks to product market competition caused by its trade liberalization, we explore whether and how competition affects privatization. We find that state-owned enterprises (SOEs) more affected by the competitive shocks are more responsive to introduce private ownership and more likely to render the state’s controlling positions. Responses are stronger when SOEs operate in industries with greater technology and efficiency/productivity gap from frontier economies or operate with excess employment and costs in regions with larger fiscal burdens. We further explore the role of oversight governments and find the results stronger among (1) local SOEs supervised by governments at a lower layer of an administrative cohort and (2) central SOEs located farther away from the central government, suggesting that information asymmetries and strategic importance of SOEs are key considerations of the state’s privatization decisions. Finally, we find regions with better market and legal institutions attract private investors and facilitate SOEs’ privatization under competitive pressures.