Why privatize or why not? Empirical evidence from China's SOEs reform

Using a firm-level panel dataset which covers over 50,000 state-owned enterprises (SOEs) across China for the years 1998 to 2003, we attempt to answer the question of why some SOEs are privatized while others remain under state control. By applying a Heckman two-stage procedure, we investigate the causes that determine SOE privatization outcome. We find that the factors most conducive for privatization are the rise of competition, the increase of FDI concentration of both industries and provinces, and the hardening of SOEs' budget constraints. Moreover, it is shown that relatively better performing SOEs, measured by per employee value-added, profitability, and export propensity, are more prone to privatization. However, we should be careful in interpreting this result, due to the problem of selection bias. Results of the first-stage selection equation suggest that many small and non-performing SOEs dropped out of the sample, possibility due to privatization. What we can conclude is that, among the remainders, the better performing SOEs are more likely to be privatized.