Can commercialization through partial disinvestment improve the performance of state-owned enterprises? The case of Indian SOEs under reforms

Abstract

State-owned enterprises (SOEs) play an important role in an emerging economy, given that they are often the biggest employer as well as the largest contributor to the economy. In the past, privatization has been used as an important governance mechanism to reduce the inefficiency of SOEs. Notwithstanding all the benefits of privatization, it is not always a feasible option due to political and legal compulsions. This article investigates the impact of an important alternate reform programme, namely, partial disinvestment on the performance of SOEs and the major contingencies under which this relationship is likely to be affected. The study undertook multiple quadratic regressions, on an unbalanced panel data from 2001 to 2014 on a sample of 4774 observations belonging to 562 Indian SOEs. The results suggest that with initial disinvestment there is an initial improvement in performance, but with subsequent disinvestments, the SOE performance is seen to decline. The results indicate that, even without full privatization, moderate corporate governance reform is potentially an effective way of improving the performance of SOEs; such reforms represent an alternative for policymakers seeking to restructure SOEs without massive privatization. The study also finds that this variation in performance with state disinvestment efforts is contingent on the institutional holding in the firm and the competitive environment. Theoretical contributions to the emerging SOE literature and practical implications for the SOE managers are also discussed.