Download - by Saul Estrin LSE
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
-6
-4
-2
0
2
4
6
8
10
2004 2005 2006 2007 2008 2009 2010
World at PPP
Developed
Emergingmarkets
Global FDI inflows (US$ bn)
0
200
400
600
800
1,000
1,200
1,400
1,600
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Developed
Em markets
Global FDI inflows (% of GDP)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
Developed
Em markets
Small em club (FDI inflows, US$ bn)
0
20
40
60
80
100
120
140
160
Ch
ina
Ru
ssia
Ho
ng
Ko
ng
Bra
zil
Ind
ia
Sau
di
Ara
bia
Sin
gap
ore
Mex
ico
Tu
rkey
Ch
ile
2008
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
0102030405060708090
Czech Republic
Hungary
Poland
Slovak Republic
Slovenia
Estonia
Latvia
Lithuania
Bulgaria
Romania
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