Financial Performance Of State-Owned Enterprises: Does Political Ideology Play A Role?

Abstract

Corporatization in the public sector entails decentralizing the provision of public goods and services to more autonomous entities, including state-owned enterprises (SOEs). Research indicates that the decision to corporatize is driven, among other factors, by the pursuit of financial sustainability in public organizations. A continuing debate revolves around whether the political ideology of incumbents is linked to the creation of SOEs. However, limited attention has been given to understanding if incumbents’ ideology shapes SOEs’ financial performance and, hence, financial sustainability. This is concerning because SOEs operate beyond political cycles, facing pressures from ideologically different governments over time. Herein, we investigate whether the incumbents’ ideologies shape SOEs’ financial performance. We hypothesize that the more right leaning the incumbent, the greater the SOEs’ financial performance. However, given that incumbents’ decisions are influenced by their political parties’ behaviors, the effects of ideology may be contingent on these factors. Thus, we investigate whether the association of incumbents’ ideology with SOEs’ financial performance is weaker when incumbents’ political parties display non-policy behaviors (e.g., by prioritizing electoral outcomes or office occupation). We analyze a 2019–2022 panel of 317 SOEs controlled by 27 subnational governments in Brazil with both FGLS and instrumental variable regression approaches. The data comprising 1,116 SOE-year observations confirm our hypotheses. Our research contributes to scholarship on the drivers of public organizations’ financial performance and sheds light on the role of political contingencies, such as incumbents’ ideology and party predominant behaviors regarding SOEs’ financial performance—a commonly overlooked gap in current research.