Question

In: Economics

Why are state owned firms in China potentially inefficient? How does the mixed ownership reform of...

Why are state owned firms in China potentially inefficient? How does the mixed ownership reform of 2015 deal with these inefficiencies?

Solutions

Expert Solution

In China there are 155,000 enterprises owned by the central and local governments. Reasons of inefficiency are:

1. There are many state owned companies(SOCs) which are not in 'strategic' sector like aviation, power etc.

2.As SOCs get cheaper finance, favoritism and lighter control by local companies they are not taken to efficient fight with private companies.

3.The officials resist change that may make them accountable Over staffing, assurance of jobs has made operations less cost effective.

4. Govt. people do not want to lose control over these companies.

Since 2015 China is following a policy of disinvestment of non profit making SOCs. They are also making management independent and responsible for results while retaining govt. control over ownership. Management team will be rewarded like private corporates like stock options. Hence privatization and disinvestments are options that China is mainly focusing on.


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