1. Hans Yeh
Privatization in China:
The Effects of Privatization on Firms’
Price-Cost Margins

2. Outline
 Introduction
 Privatization: Literature &
Empirics
 China: Timeline of
Privatization
 Model & Results
 Conclusions and Future
Research

3. 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”

4. Introduction:
Number of SOEs (1970-2006)
1997: “Grasping the
120,000 large, Releasing the
small”
“抓大放小”
1993:
CCP
initiates
Socialist
Market
Economy
25,000

5. Outline
 Introduction
 Privatization: Literature &
Empirics
 China: Timeline of
Privatization
 Model & Results
 Conclusions and Future
Research

6. Problems with
State-Owned Enterprises (SOEs)
Agency Conflict Political Conflict
Ownership gives  Excess employment and
wages (e.g.: Coal mines)
special incentives  Poor choices of products
(Vickers and Yarrow, 1988)
and locations (e.g.:
Concorde)
…
 (Shleifer and Vishny, 1994)
State-Owned Firms are Inefficient

7. Privatization Theory
Ownership School Management School
Focus on Ownership: Improve management
Separate government (Incentivize):
from SOE is key. Managerial autonomy
Privatization is essential Bonus systems
(e.g.: Shleifer and Vishny, (e.g.: Li and Wu, 2002)
1994)
This paper focuses on the ownership school

8. Empirical Studies
Time-Series Cross-Sectional
Compares Pre- and Post Compares the
privatization firms’ performance of State-
performances owned enterprises with
(e.g.: La Porta and López-de- private or privatized
Silanes, 1997) firms (e.g.: Konings et al
2005)
State-Owned Firms are Inefficient

9. Outline
 Introduction
 Privatization: Literature &
Empirics
 China: Timeline of
Privatization
 Model & Results
 Conclusions and Future
Research

10. Timeline of China
China Follows the September 1976 1997: SOE Crisis
Soviet Model of Chairman Mao Chinese government
Nationalization due to Zedong dies launches policy of
the apparent success
“Grasping the Large,
to industrialize
Releasing the Small”
October 1949
Founding of 1993: China switches
the People’s to a de facto market
Republic of economy
China (PRC)
Number of State-
1978: Reform and Owned enterprises
Open Door Policy dropped from 120,000
(Deng Xiao Ping) in mid 1990s to
25,000 in 2006 Future:
1976-1978: Mass privatization
Internal Power Struggle programs still have
to take place

11. Outline
 Introduction
 Privatization: Literature &
Empirics
 China: Timeline of
Privatization
 Model & Results
 Conclusions and Future
Research

12. Main Findings
1 Privatization has a positive impact on firms’ PCMs
The positive impact is highest for Foreign and
2 Hong Kong, Macao and Taiwanese enterprises
PCMs are lower in highly competitive markets
3 compared to less competitive markets

13. 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
pit  cit
PCM it 
pit
 Problem: Marginal Costs are unobservable
Sales  Costs pit qit  cit qit pit  cit
PCM it   
Sales pit qit pit

14. 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

15. Types of Legal Entities
Branch Company Jointly State-owned Sino-Foreign Cooperative Venture
China & Foreign Cooperation Management Jointly-Owned Enterprise Sino-Foreign Joint Venture
China & Foreign Joint Venture Managemen Limited Company Sole Investment (Hongkong,Macao and Tai
Collective Joint Ownership Enterprise Not classified Sole State company
Collective-owned Other Enterprise State Joint Ownership Enterprise
Collectively-Owned Enterprise Other Enterprises State-Owned Enterprises
Cooperative Management (Hongkong,Macao Other Joint Owned company State-owned
Exclusive State-Funded Company Other Joint Ownership Enterprise State-owned and Collective Cooperation
Foreign Invested Stock Limited Company Other Limited Liabilities Stock Cooperative Enterprise
Foreign Investment Other Limited Liability Company Stock Limited Company
Foreign Investment Share Holding Private Cooperative Enterprise Wholly Foreign Owned Enterprise
HK, Macau or Taiwan Joint Cooperative V Private Limited Company
Wholly HK, Macau or Taiwan Invested Sto
HK, Macau or Taiwan Joint Venture Private Limited Liabilities
Wholly HK, Macau or Taiwan Owned Enterp
HK, Macau or Taiwan-Funded Enterprise Private Partnership
Wholly Privately Owned Enterprise
Investment Share Holding (Hongkong,Maca Private Share Holding
Joint State-Collective Enterprise Private Sole Investment
Joint Venture Management (Hongkong,Maca Private Stock Limited Company
Joint-stock company Process Company, Not Legal Entity
Jointly Collective-owned Share Co-operation

16. Fixed Effects Model
PCM it  POEit  FOEit  HMTit  COEit  DJVit  CON jt  TANit  i   it
 POEit Privately owned enterprise (domestic),
 FOEit Foreign owned enterprise,
 HMTit Hong Kong, Macao or Taiwanese enterprise,
 COEit Collectively-owned enterprise,
 DJVit Domestic Joint-Venture;
 if all dummies are 0, the particular firm is state-owned
 CON jt C4-index of concentration in sector j at time t: measure of domestic
competition
 TANit Tangible fixed assets: market entry barriers
 i Unobservable firm-level fixed effect: sunk costs, quality of manager, etc

17. Regression Results for China,
Eastern China and Western China
CHINA Panel EASTERN CHINA Panel WESTERN CHINA Panel
Price-Cost Margin .0795244** Price-Cost Margin .0705933** Price-Cost Margin .1089214**
(.0070025) (.0076705) (.0309204)
Private (Domestic) .0004755 Private (Domestic) -.0028836 Private (Domestic) -.0051572
(.004636) (.005339) (.0141416)
Foreign Enterprises .0105914 Foreign Enterprises .0144414** Foreign Enterprises -.0269522
(.0068611) (.0072341) (.0454797)
HK, Macao & Taiwan .0169595** HK, Macao & Taiwan .0220378** HK, Macao & Taiwan -.0326468
(.0068938) (.0073764) (.0377145)
Collective Enterprises .0124891** Collective Enterprises .0057725* Collective Enterprises .0157447**
(.0029587) (.0035073) (.0064955)
Domestic JVs -.0004525 Domestic JVs -.0045104 Domestic JVs -.0149258
(.0066292) (.0074605) (.0189903)
C4-Index .0000274 C4-Index .0000353 C4-Index .0001402**
(.0000225) (.0000279) (.0000697)
Tangible Fixed Assets .0030476** Tangible Fixed Assets .0034515** Tangible Fixed Assets .0007166
(.0006125) (.0006585) (.0029086)
Year Dummies Yes Year Dummies Yes Year Dummies Yes
# observations 178.406 # observations 141.361 # observations 13.893

18. Disentangle effect on PCM
Cost- Price-
decreasing increasing
+ behavior behavior
pit  cit
PCM it 
pit
Price- Cost-
decreasing Increasing
– behavior behavior
– +

19. Disentangle effect on PCM
C4-Index < 5% C4-Index > 5%
Competitive Sample Non-Competitive Sample
Firms are price-takers
 PCM increase suggests cost-
reducing behavior
 PCM decrease suggests
cost-increasing behavior
Results remain robust for a
cut-off value of 10%

20. 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

21. 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

22. Effects on Price-Cost Margins
PCM it  POEit  FOEit  HMTit  COEit  DJVit  CON jt  TANit  i   it
+ +/- -
Foreign Owned Privately Owned
HK, Macau and Taiwan Domestic Joint Venture
Collectively Owned
C4-index
(Domowitz et al, 1988)
Tangible Fixed Asset

23. Outline
 Introduction
 Privatization: Literature &
Empirics
 China: Timeline of
Privatization
 Model & Results
 Conclusions and Future
Research

24. Conclusion
1 Privatization has a positive impact on firms’ PCMs
The positive impact is highest for Foreign and
2 Hong Kong, Macao and Taiwanese enterprises
PCMs are lower in highly competitive markets
3 compared to less competitive markets
China followed a unique path of reforms:
gradual and local experimental

25. Future Research
1 Central and Northeastern China
International Competitive Pressure (e.g.: Import
2 Penetration)
Long-Run Analysis (Innovation, Product
3 Quality,…)

26. 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

27. 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

28. Extra Slide 2:
% of Firms with Different Types of Ownership
Based on No. Firms
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
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

29. 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