Why do Chinese local governments transfer their rights of control over SOEs to the central government?

Abstract

This article investigates local authorities’ motives for transferring their rights of control over state-owned enterprises (SOEs) to the central government. Using a difference-in-difference approach, we find that both employment and investment improves significantly following such transfers, and these findings are more pronounced among firms located in regions where the political pressure on local officials is higher. However, we fail to find any significant improvement in profitability. Our findings suggest that local governments tend to alleviate the political pressure they face by giving up their control rights and even sacrifice long-term economic benefits to do so.

Keywords:

• state-owned enterprises
• control rights
• China

JEL Classification:

• H11
• H7
• J63

Notes

¹ The privatization reached its peak during the period 1998–2002 (Fisman and Wang, forthcoming).

² Between 1995 and 2003, more than 43 million employees of SOEs were made redundant (Xu et al., 2005).

³ The unreported results show that, after the matching, the main variables were indifferent between the treated and nontreated groups. We did not use the propensity scoring matching (PSM) approach due to the small sample size of the treated firms.

⁴ As suggested by the anonymous referee, the motivation for transfer of ownership might be greater among export-led SOEs than others due to higher needs for protecting employment. In an attempt to address the point, we carry out a subsample analysis for comparing export-led and nonexport-led SOEs. Export-led industries are identified according to the China Customs Statistics. The untabulated results suggest that our main findings, i.e. the increase in employment and investment, are primarily driven by the export-led SOEs operating in regions with higher political pressure. The results are available upon request.