Ownership reform among state firms in China and its implications

Purpose - To test the effects of ownership structure on the strategy and performance of former state-owned enterprises (SOEs) in China. Design/methodology/approach - Based on a sample of the former state-owned manufacturing firms listed on the Chinese Stock Exchanges before 1995, we study the ownership effects on firms' diversification strategies and their performances. Findings - Diversifiers actually have a lower level of state ownership. However, firms' financial performance and other performance dimensions such as new product development and overseas investment are actually better for single-product producers. Hence, firms with lower state-ownership tend to be more likely to pursue unrelated diversifications. Research limitations/implications - The study uses a cross-sectional design, which makes it difficult to assess the causality of the variables and to study the changes of firm behavior over the years. Practical implications - The results highlight the need for the improvement of control system in transitional economy such as China before embarking on ownership changes. Without the changes in the control systems, the ownership reform alone seems insufficient to improve the performance of the former SOEs. Originality/value - This study provides evidence on the effect of ownership control, diversification strategy and performance on formerly SOEs in China. It has important policy implications for reformers in the developing economies engaging in privatizing their SOEs.