Transcript Slide 1
Privatization and Corporate
Governance Before and After the
2007/9 Crisis: Lessons from
Developing and Transition
Countries*
by Saul Estrin
LSE
*Presentation based on Estrin,S., Hanousek, J., Kocenda, E. and
Svejnar, J., “The Effects of Privatization and Ownership in Transition
Economies”, Journal of Economic Literature, 2009
Outline of Presentation
Foreign investment, ownership and
governance in developing and transition
economies
Policies, Institutions and Privatization
Sequencing of Privatization
Privatization and Company Performance
Conclusions
Corporate Governance and Ownership
• In developed economies, most large firms are joint stock
and important areas for research are the ways in which
the principal (owner) controls the managers (agents).
Issues include
– Ownership concentration
– Extent of managerial or employee ownership
• In developing and transition economies
– Institutional context makes enforcement of agency contracts more
costly – leads to concentrated ownership (family or state)
– Weak capital market institutions leads to emergence of diversified
firms (business groups)
– Foreign owners may control a relatively large share of assets
– With such concentrated ownership, many corporate governance
issues take the form of principal-principal conflicts
Foreign Direct Investment to Developing
and Transition Economies
• Increasingly important share of global FDI –
accelerated rather than slowed by crisis
• For the first time in 2009 FDI to developing
economies overtook FDI into developed
economies
• Remains highly concentrated to a few major
transition and developing economies e.g. China,
Russia, Brazil and India
Real GDP growth, %pa
10
World at PPP
8
6
4
Developed
2
0
-2
-4
-6
2004 2005 2006 2007 2008 2009 2010
Emerging
markets
Global FDI inflows (US$ bn)
1,600
1,400
1,200
1,000
Developed
Em markets
800
600
400
200
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
0
Global FDI inflows (% of GDP)
5.0
4.5
4.0
3.5
3.0
Developed
Em markets
2.5
2.0
1.5
1.0
0.5
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
0.0
Chile
Turkey
Mexico
Singapore
Saudi
Arabia
India
Brazil
Hong
Kong
Russia
China
Small em club (FDI inflows, US$ bn)
160
140
120
100
80
2008
60
40
20
0
Some Evidence on Ownership Concentration
in Transition and Emerging Markets
• Top 15 families own 62% of listed assets in Indonesia, 55% in
Philippines, 53% in Thailand and 38% in Korea. (Peng 2007)
• On average in East Asia, 68% of listed companies are owned by a
single controlling owner. This ranges from 77% in Korea to 40% in
Thailand (Peng 2007)
• Top management derives from the family of the largest
shareholder in 85% of listed firms in Malaysia and Indonesia,
81% in Korea and 80% in Taiwan (Peng 2007)
• In Russia in 2003, the 22 largest private domestic owners control
42% employment and 39% of sales (Guriev and Rachinsky 2005)
• These outcomes unlikely to be affected by recent crisis; if
anything the converse
Purpose of JEL Study
To evaluate the economic effects of
privatization, focusing on experiences in post
communist countries and China
Transition economies as a laboratory of
systemic change
Findings
Privatization to foreign owners raises efficiency;
less clearcut in China because domestic
ownership also raises TFP
Domestic private ownership raises TFP (but
less than foreign ownership) in CEE and
Ukraine but not in Russia
Findings Ctd
Ownership concentration important
Worker ownership does not have negative
effect on performance
New firms more efficient than existing ones,
especially foreign start-ups
Policies, Institutions and
Privatization
Megginson and Netter (2001) show
privatization improves company efficiency
and profitability in developed economies
Results confirmed by Megginson and Sutter,
2006, for developing economies
Positive association between ownership
concentration and firm performance in Asia
(Heugens et al 2009)
Results stronger for foreign than domestic
and “external” than “insider” owners
Private Sector Share of GDP
Hungary
Poland
Slovak Republic
Slovenia
Estonia
Latvia
Lithuania
Bulgaria
06
20
04
20
02
20
00
20
98
19
96
19
94
19
92
Romania
19
90
90
80
70
60
50
40
30
20
10
0
19
Czech Republic
Russia
Ukraine
Sequencing of Privatization
Govenments sequence privatization to
Avoid transaction and congestion costs
Reveal information about firms to buyers
Avoid political opposition (gradualism)
Avoid unemployment
Which Firms Do They Privatize
First?
Gupta,Ham, Svejnar (2008)
Firms that are more profitable
Firms with higher market shares
Firms in industries subject to greater demand
uncertainty and in downstream industries (needing
flexible management)
Important implications for reverse causality
Privatization and Company
Performance
Foreign Investors
Domestic Owners
Entrepreneurs
Methodological Issues
Previous studies -- astonishing variation in
findings, from strong positive to strong
negative effects of privatization on
performance
Methodological Issues
Reasons partly methodological: early studies
used small (unrepresentative) samples,
unable to control for selection/endogenity,
and data period too short
We use all available studies (150 plus) and
categorize by estimation method
Our Approach
Look at studies in CEE, CIS and China
Select studies that employ fixed effects or IVs to
handle the selection/endogeneity problem
inherent in privatization
=> use 14 studies considered by Djankov and
Murrell (2002) plus 20 additional ones
Foreign Direct Investors in
Transition Economies
Focus on effects on level and rate of growth of
TFP
Profitability
Revenues (scale)
Other indicators (labor productivity, employment, wages,…)
Various measures used in each category =>
graphical analysis rather than meta-analysis
Foreign Direct Investors in
Transition Economies
Privatization to foreign owners increase TFP
or profitability in CEE and increases or has no
effect in CIS
Domestic Owners in Transition
Economies
In CEE effect of domestic private ownership
on TFP is
Positive but smaller than that of foreign ownership
Greater in later period
In CIS the effect is nil or negative
Reasons for previous ambiguity in literature is
failure to take account endogeneity/selection
issues
Effects of Concentration and Employee
Ownership on TFP
Concentrated (majority) private ownership –
mostly positive effects on TFP (driven
primarily by foreign ownership)
Positive in CEE and Ukraine; negative in Russia
7 studies look at employee (insider)
ownership effect on TFP => effects
insignificant in 6 and positive in one
Found negative in D-M (sensitivity to handling
selection bias and recalculations in D-M)
Effect of Private Ownership on TFP Growth in
CEE
Overall -- small positive or insignificant
effect
Foreign ownership – insignificant
Domestic private ownership – positive or
insignificant
Effect of Private Ownership on Level and
Growth of Profit
Level of profitability
Positive or insignificant effect in CEE
Insignificant in (one study) in CIS
Rate of growth of profitability
Insignificant effect in CEE
Positive in (one study) in CIS
Effect of Private Ownership on Revenues
(Scale)
Level of revenues
Positive (and especially strong for foreign ownership)
effect in CEE
Mixed effect in CIS
Growth of revenues
Small positive effect of foreign ownership and
insignificant effect of domestic ownership in CEE
Insignificant effect of (undefined) private ownership in
CIS
Entreprenerial Ownership
Sabirinova et al (2005) find foreign start
ups less efficient than existing foreign
owned firms, more efficient than
domestic start-ups, which are more
efficient than existing domestic firms
Entreprenerial Ownership
Commander and Svejnar (forthcoming)
find domestic start-ups less efficient than
foreign owned firms but not different from
domestic or state owned firms.
Effects in China
Ltd. Number of studies, not very sophisticated
methodology
Positive significant effect of foreign ownership on TFP
Results on effects of domestic nonstate ownership
mixed but generally weakly positive for TFP and
profitability
Domestic Owners in China
Tian and Estrin (2007) -- impact of private
ownership is U-shaped
Initially ROA decreases as private ownership
increases, and then rises
Explain by concentration of state
ownership and benefits dominant state
ownership can bring in China
Conclusions
Clearer picture is emerging from
methodologically more sound studies on
transitions economies
Despite reservations about the methods
at the time, privatization not a failure
when considered more than ten years
hence
Conclusions 1
Privatization to foreign owners clearly
raises performance relative to state
ownership, and to domestic private
ownership
Privatization to new domestic owners
also raises performance if institutions are
better developed, ie CEE (and China?)
relative to Russia (CIS)
Conclusions 2
Reasons for Superior Performance of Foreign
Owned Firms
Access to top managerial skills and to world
markets
Domestic ownership sometimes associated with
looting, tunnelling, defrauding minority shareholders,
reducing performance
Privatization process initially prevented domestic
ownership concentration; it took time to squeeze out
dispersed shareholders
Conclusions 3
Results highlight importance of good
management and corporate governance,
access to world markets, presence of
functioning legal and institutional system for
company performance
Foreign firms bring in expatriate managers
and train local ones
Conclusions 4
Foreign firms‘ corporate governance
compensates for underdeveloped local
institutions, laws and norms
They bring access to global distribution
networks
Domestic owners can achive the same in time
and are increasingly doing so