What Happens When the State Is Bossing around Markets? An Analysis of the Performance Differentials between Businesses of the State (BOS) and Private-Owned Enterprises (POEs)

This paper studies the performance differentials between privately-owned enterprises and businesses of the state. Businesses of the State (BOS) are firms with 10 percent or more direct or indirect state participation. By analyzing firm-level data across 16 European countries between 2011 and 2020, the paper finds evidence that state ownership matters for operational and financial performance and sheds light on how and when it matters. The analysis disentangles the multiple forms of state participation and its effects on firms’ performance by exploring the heterogeneity across sector type, levels of state participation, and degree of separation (direct versus indirect shareholding). It also analyzes the early response of businesses of the state to the COVID-19 shock. The results suggest that businesses of the state underperform in terms of labor productivity, profitability, and return on investments, although the effects are heterogeneous depending on the level of state participation, degree of separation, and type of sector. Businesses of the state appear to be more financially leveraged vis-à-vis their private counterparts, suggesting potential soft budget constraints. Wider differentials in profitability and return on investments are evidenced when the state operates in fully competitive sectors that are viable for private participation, underscoring the opportunity costs of state ownership in those sectors. Furthermore, the findings show that mixed ownership with the private sector can drive better results when compared to fully owned businesses of the state. Similarly, a higher degree of separation from the state seems to improve performance, highlighting the role of corporate governance and ownership reforms to foster independence. Finally, businesses of the state demonstrated greater resilience in preserving jobs in the short term during the COVID-19 pandemic in 2020.