Privatization and restructuring in China: Evidence from shareholding ownership, 1995-2001

Studies of the impact of privatization on enterprise performance encounter difficult issues of selection bias, endogeneity, and adjustment costs. In this paper, we analyze the performance impact of conversion on China's state-owned enterprises (SOEs) taking these issues into account. We also distinguish between the direct effect of formal conversion, holding the firm's asset structure fixed, and the induced effect, in which formal conversion leads to new investment and reductions in the proportion of state-owned assets. Within our sample, we find that the conversion of SOEs to shareholding enterprises contributes to overall increases in both current productivity and innovative effort. In particular, relative to unconverted SOEs, conversion leads to the use of more labor-intensive modes of production, which is associated with significant increases in returns to capital.