Successful Factor Market Competition Pre-Privatisation? China's eclectic.com

Can factor market competition, given pertinent incentives, bring about efficiency gains, or is privatization necessary? The authors assess the impact of factor market competition on Chinese state-owned enterprises' productivity in a laboratory-like setting. The empirical evidence suggests that substantial efficiency gains are achievable pre-privatization. Methodologically, they adapt an algorithm developed by (Olley and Pakes 1996) which deals with simultaneity and selection bias in production function estimation. This is required since the reform process that introduced factor market competition involved endogenous group selection. While macro-level timing was important, enterprise characteristics, chiefly capital intensity and productivity, played an important role in the sequencing of reforms. Further, reform-induced competitive pressures brought about significant efficiency gains prior to privatization.