Private Ownership and Corporate Performance: Some Lessons from Transition Economies

Using a large sample of data on mid-sized firms in the Czech Republic, Hungary, and Poland, the authors compare the performance of privatized and state firms in the environment of the postcommunist transition. They find strong evidence that private ownership--except for worker ownership-- dramatically improves corporate performance. They find no evidence of the"privatization shock"that was supposed to afflict the behavior of firms undergoing rapid changes in ownership. Instead, they observe a severe shock from marketization, affecting both state and privatized firms--but a shock for which private ownership provides a powerful antidote. Among their other findings are : a) Private ownership is most effective in improving a firm's ability to generate revenues, an area in which entrepreneurship seems to be required. Ownership also affects a firm's ability to remove the rather obvious cost inefficiencies inherited from the past, but this effect is less pronounced, as both state and privatized firms engage in significant cost restructuring. b) Privatized firms generate significantly more employment gains than state firms. It is their superior ability to generate revenues, rather than competence at cost-cutting, that allows them to sustain or expand employment. This is why privatization is the dominant strategy for expanding employment in transition. c) Outsider-owned firms perform better than insider-owned firms on most performance measures, but there is enough difference between employee- and manager-owned firms to suggest that putting all insiders under a common umbrella is unjustified. Although the effects of managerial ownership are ambiguous, putting employees in control appears to offer no advantages over state ownership on any measure and creates a distinct disadvantage in terms of employment performance. d) Among outsider owners, privatization funds seem to do as well at revitalizing the privatized companies as do other outsider owners; in particular, the authors find no evidence that funds are less effective than'strategic'investors. And foreign investors provide perhaps less of an edge than might have been expected; their impact appears no stronger than that of major domestic outsiders.