1 / 20

Impact of Privatization and Competition on Firms' Performance in Emerging Economies

This study analyzes the effects of privatization and competitive pressure on firms' price-cost margins in emerging economies. Using data from Bulgaria and Romania, it examines how ownership changes and market liberalization influence firm performance indicators. The findings suggest that privatization leads to cost reductions rather than price increases, with a stronger impact in highly competitive sectors. International competition is shown to affect pricing behavior differently in concentrated and non-concentrated sectors.

arthur-faulkner
Download Presentation

Impact of Privatization and Competition on Firms' Performance in Emerging Economies

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. The Effect of Privatization and Competitive Pressure on Firms’ Price-Cost Margins Micro Evidence from Emerging Economies Jozef Konings, Patrick Van Cayseele and Frederic Warzynski LICOS, University of Leuven, Belgium

  2. Motivation • Legacy of Central Planning: Many large firms: • Size Distribution 1990 in Selected Countries (Roland, 2000)

  3. Motivation (contd.) • Rapid institutional changes in Central and Eastern Europe: • Privatization • Liberalizing markets (hence increased competitive pressure) • Transition countries are getting close to a natural experiment to evaluate these effects on firm performance, measured here as price-cost margins.

  4. Effects of Privatization? • Traditional Argument Against Privatization:  Firms increase pricesLoss of Allocative Efficiency (Tirole, 1991; Li, 1999; Joskow and Schamelensee, 1995) Ignores dynamic effects of privatization • Due to changed ownership, incentives to engage in restructuring and innovation improve, which lowers costs (Schmidt, 1996; Hart, Shleifer, Vishny, 1997; Bennett and Maw, 2000)

  5. Effects of Competitive Pressure? Contestability argumentprice-cost margins will reduce (evidence: Levinsohn, 1993…) But: In a dynamic context: Trade protection may help to invest in catching-up (Rodrik, 1992) Complementarity between competition and privatization?  Schmidt (1996) shows there is due to the hardening of budget constraints when there is more competition.

  6. Contributions • Previous studies had to rely on small samples of firms, this paper uses a representative panel of firms in Bulgaria and Romania • Estimate price-cost margins using the Roeger (1995) method, which yields consistent estimates, which is in the spirit of recent work that estimates production functions (Olley and Pakes, 1995).

  7. Methodology • Roeger (1995):method for estimating markups using company accounts • Other methods: require price data. • Assume a CRTS production function

  8. Methodology (contd.) • Under perfect competition, the Solow decomposition is:

  9. Methodology (contd.) • Under Imperfect competition (Hall, 1988) with μ = P/MC or this can be written as: (primal Solow residual (1)) where β = (P-MC)/P = 1-1/μ = the lerner index

  10. DATA • Data Source: Amadeus data base of Bureau Van Dijck •  Company accounts of all medium and large sized enterprises of Bulgaria and Romania •  Harmonized by BvD across countries • 1701 firms in Bulgaria and 2047 firms in Romania • Background: Bulgaria: • GDP per capita in 1999: 1513 USD/capita • Population: 8 million • Privatization started late, after 1996 • Competition Policy: weak (EBRD) Romania: • GDP per capita in 1999: 1512 USD/ capita • Population: 22.3 million • Privatization started late, after 1996 • Competition Policy: weak (EBRD)

  11. DATA (contd) • Sample period : 1994-98 • Ownership information only for 1997- 1998 • We dropped those firms for which we could not trace ownership information. Table 1: Comparison between Amadeus and National Statistics, 1998 Sales coverage ratio = total sales in Amadeus / total manufacturing sales. Employment coverage ratio = total employment in Amadeus / total manufacturing employment.

  12. Table 3: Average Ownership Shares in Sample Note: standard deviations in parentheses

  13. Table 4: Types of Ownership (percentage of firms in the sample)

  14. Table 5: Summary statistics Summary Statistics Bulgaria: Sample Means and Standard Deviations

  15. Summary Statistics Romania: Sample Means and Standard Deviations Note: Standard deviations in parentheses; values expressed in thousands of $

  16. Size Distribution of the Sample in 1997

  17. Table 3 Estimates of Price-Cost Margins in Different Sectors

  18. Table 4 Results

  19. Table 5 Results for Highly versus Lowly Competitive Sectors

  20. Conclusions • Privatization is associated with higher price-cost margins • The main effect of privatization is on cost reduction, rather than price increases • The effects of privatization are stronger in highly competitive sectors • International competition disciplines firms’ pricing behavior, in highly concentrated sectors, in lowly concentrated sectors the international competition is associated with higher price-cost margins • Privatization and competitive pressure go together

More Related