Reforming State-Owned Enterprises: Diversifying Ownership Versus Improving Management

One line of thought on reforming state-owned enterprises (SOEs), the ownership school, stresses diversifying ownership to eliminate government control. A second line of thought, the management school, emphasizes the need to improve government’s management of SOEs by, for example, granting SOE employees the autonomy and profit incentives. Utilizing data on 680 SOEs in China, over 1980-94, we tested the relative effectiveness of two kinds of reform measures. Our results yield strong support for the ownership school and very mixed evidence for the management school. Moreover, we found that the impact of ownership diversification on SOEs’ economic performance was as strong as that of enhancing product-market competition.