Performance Evaluation of State-Owned Enterprises in Theory and Practice

Abstract

This study explores the goal orientation of state-owned enterprises (SOEs) with a view to develop a behavioral theory of SOEs. It is set in India, where as in many other countries the government expects SOEs to promote the “public interest” rather than maximize profits. The research design consisted in searching for patterns in the subjective evaluations of a set of Indian SOEs by critical environmental actors (senior bureaucrats and influential journalists). The study attempted to get at each respondent's “espoused theory” for performance evaluation as well as his or her “theory-in-use,” and compared both with official goals as well as the prescriptions of welfare economists. Five models of performance evaluation, varying in criteria and weighting schemes, were considered. The results showed—with surprising consistency—that commercial profitability was the most important criterion that explained bureaucrats' subjective evaluations. Lack of comprehensive information seemed to accentuate their reliance on profitability—but not by very much. For a minority of bureaucrats (Type 1), the more important explanation seemed to be their “incorrect” belief that SOEs could be judged like private firms, official policy notwithstanding. For the majority (Type 2), who espoused views consistent with official policy, the explanation seemed to be conceptual confusion or double standards. Both types also behaved as if they would like SOEs to maximize profitability rather than just break even or earn a reasonable return. Some of these findings were true for responding journalists as well. Given these results, managers of Indian SOEs can be expected to seek profits not only to reduce financial dependence on government but also to gain a measure of external legitimacy. Recognizing the importance of profitability as a criterion-in-use, they can be expected to propose strategies that would increase their firm's profitability and resist those that would reduce it, regardless of official goals. Where managers are free to act independently, profitability may prevail as the dominant decision criterion, but where they are not, the outcome may depend on more complex factors. More generally, the profit motive in SOEs may be as strong or stronger than it appeared to be in India in countries with (a) less sophisticated administrative systems or personnel; (b) an official ideology more to the right than in “socialist” India; and (c) a higher proportion of mixed enterprises. The paper concludes with the implications of these findings for the design of performance evaluation systems at the government-SOE interface.