The Effects of Exports, FDI, and Innovation Competence on the Efficiency and Profitability of Privatized SOEs in China

Abstract

Purpose – This study investigates the effects of exports, foreign direct investment (FDI), and innovation competence on the efficiency and profitability of privatized Chinese state-owned enterprises (SOEs). Design/Methodology/Approach – We apply fixed effects regressions after estimating the corporate efficiency using data envelopment analysis (DEA) methodology by industry around privatization. We use a panel dataset of Chinese listed firms from 2009 to 2017, with 10,950 year-firm data of RESSET and China Stock Market & Accounting Research (CSMAR) databases. To reflect the complicated relationships between exports, FDI, innovation competence, efficiency, and profitability of privatized firms, we apply simultaneous equations models. Findings – First, the privatization of SOEs in China improves their innovation competence, measured in the number of patents, overall corporate efficiency, and firms’ exports. Second, the innovation competence of firms improves their corporate efficiency and exporting capability, but it aggravates their profitability. Moreover, research and development (R&D) expenditures improve their innovation competence and return on assets, but these expenditures aggravate their efficiency and exports. Third, the corporate efficiency of privatized SOEs improves their profitability for 5 years after privatization, including the year. Fourth, exports have inverse U-shaped effects on efficiency and return on assets, and on their innovation competence. Fifth, overseas direct investments have inverse U-shaped effects both on innovation competence and efficiency and return on assets, whereas their effects on exports are not significant. Sixth, the positive effects of privatization on corporate profitability and such U-shaped effects of exports on corporate profitability last for one year after privatization, whereas the U-shaped effects of FDI last for 3 years. Research Implications – The privatization of Chinese SOEs has successfully improved their technological efficiency and profitability for a short time, which turns adversely afterward. The results imply that privatized firms need improvements in the efficiency of technological innovation and R&D investments for longer-term improvements in profitability and global competitiveness.