Saving or Stripping Rural Industry : An Analysis of Privatization and Efficiency in China

This paper describes the process of privatization of China's Township Enterprises. Findings from a recent field survey by the authors show how far privatization has proceeded and how it has affected firm performance. The pervasiveness and impact of privatization are readily apparent. The privatization in the mid-1990s was deep and fundamental. More than 50% of local government-owned firms have transferred their shares to the private sector, partially or completely. Privatization is widespread, regardless of what definition we use (share shifting, controlling interest shifting, or complete). Although we do not find any evidence in our descriptive statistics that private and privatized firms outperform government ones, the private sector does appear to be 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 rural industries, including agro-industrial firms, would rise, if township enterprises privatized. The impact of privatization, however, does not occur immediately. 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 further. However, we cannot say if the gain in efficiency is enough to make rural industries competitive in the future