Can a government initiate enterprise reform to improve efficiency? A cross-section analysis of the Chinese pharmaceutical industry

This paper examines the effects of state-owned enterprises (SOE) privatization, implemented by the Chinese government in the 1990s, on enterprise efficiency for a sample of non-privatized SOEs and privatized ex-SOEs. The study calculates input-oriented DEA meta-frontier efficiency scores, after accounting for heterogeneity in technology across groups. These scores are used to test whether or not one group's technology dominates the other. A measure of additional input saving is also provided if these enterprises have access to unrestricted meta-technology. The analysis of the Chinese pharmaceutical industry reveals that privatization has not improved enterprise efficiency, at least in the short run. Almost 56% of inputs could be proportionally saved if these privatized ex-SOEs had been efficient, relative to the meta-production technology while non-privatized SOEs could proportionally save only 51%. Privatized ex-SOEs had less ability to access to meta-technology. This finding could be explained by subsequent observations that China, at the time of our analysis, did not have well-established intellectual property rights and formal drug approval procedures; these two factors are important driving forces for developing joint ventures with foreign investors to gain additional capital funding and technology transfer. Broadly speaking, our results are consistent with the subsequent shakeup in the Chinese pharmaceutical industry.