Saving or stripping rural industry: an analysis of privatization and efficiency in China

This paper describes the process of privatization of China's Township Enter prises. Findings from a recent field survey by the authors show how far pri vatization has proceeded and how it has affected firm performance. The perv asiveness and impact of privatization are readily apparent. The privatizati on in the mid-1990s was deep and fundamental. More than 50% of local govern ment-owned firms have transferred their shares to the private sector, parti ally or completely. Privatization is widespread, regardless of what definit ion we use (share shifting, controlling interest shifting, or complete). Al though we do not find any evidence in our descriptive statistics that priva te and privatized firms outperform government ones, the private sector does appeal. to he beginning to manage its firms (e.g., labor and inventories) somewhat differently. Our multivariate analysis, however, finds a positive impact of privatization on technical efficiency. Efficiency of China's rura l industries, including agro-industrial firms, would rise, if township ente rprises privatized. The impact of privatization, however, does not occur im mediately. Transitional costs apparently reduce private firm efficiency in the year that firms are being privatized, it is possible to surmise that as privatized firms complete their ownership transition and continue to learn how to adapt to China's business environment that the gains could rise fur ther. However, we cannot say if the gain in efficiency is enough to make ru ral industries competitive in the future. (C) 2000 Published by Elsevier Sc ience B.V.