Journal of Policy Modeling 28 (2006) 281–292

The policy-fit view on the efficiency

effects of privatization
Hsueh-Liang Wu ∗
Department of Business Administration, National Cheng Kung University,
1 Ta-Hsueh Road, Tainan 701, Taiwan, ROC
Received 1 February 2005; received in revised form 1 September 2005; accepted 1 October 2005
Available online 28 November 2005

Abstract
As the performance outcome of privatization is prevalently considered a critical dimension of policy
efficacy, the empirical research in this field so far has provided policy-makers with rich but inconclusive
evidences. Furthermore, many studies comparing the same-firm performance before and after privatiza-
tion overlook the diverse factors shaping the post-privatization environment. With the ANCOVA models
on a sample of 34 privatized entities in Taiwan, this study examines, from the policy-fit view, the effi-
ciency effects of policy measures in support of ownership transfer. Contextual and organizational factors,
including market openness, continued state presence on boards, and SOE health, are used to capture the
sources of productivity gains of privatization. Implications developed are relevant for the policy design of
privatization.
© 2005 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.

JEL classification: H42; L33

Keywords: State-owned enterprise; Efficiency gains; Policy efficacy; Privatization

1. Introduction

The role of government in the economy has long been debated throughout history. Theory alone
is thus unlikely to be conclusive in the trade-offs between government and private ownership.
State ownership, regarded as economic and political responses to market failures, experienced a
period of popularity from 1930s. However, the critique on state ownership also dates back to the

∗ Tel.: +886 6 2757575; fax: +886 6 2003169.

E-mail address: wuhl@mail.ncku.edu.tw.

0161-8938/$ – see front matter © 2005 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.
doi:10.1016/j.jpolmod.2005.10.009
282 H.-L. Wu / Journal of Policy Modeling 28 (2006) 281–292

work of Hayek (1945) arguing that state-owned enterprises (SOEs) are inherently inefficient than
private firms. Under the changing economic environment in the 1970s, industrialized countries
understood that only by reducing the role of the public sector could economic growth be sustained.
This realization spawned the trend toward privatization, which soon caught on from developed
through developing countries.
As the post-privatization performance outcome is prevalently considered a critical dimension
of policy efficacy, prior research on this subject has provided policy-makers with rich evidences
that privatization is a powerful tool for improving the financial and operating performance of pri-
vatized companies in many different institutional settings. The MNR methodology (Megginson,
Nash, & Van Randenborgh, 1994), shedding particular light on performance effects of priva-
tization by comparing performance proxies in certain pre- and post-privatization periods, has
been followed by many studies (such as Boubakri & Cosset, 1998; Dewenter & Malatesta,
2001; D’Souza & Megginson, 1999; Macquieira & Zurita, 1996) for large samples of econom-
ically significant firms from different industries, privatized in different countries, over different
time periods. However, it has also been questioned in light of ignoring relative market move-
ments before and after privatization (Megginson & Netter, 2001). In addition, as MNR-type
studies barely account for the impact on privatized firms of any regulatory or market-opening
initiatives that are often launched simultaneously with or immediately after major privatiza-
tion programs, identification of the sources of post-privatization performance gains remains
elusive.
As one of Asia’s “four little dragons” for strong economic growth over decades, Taiwan exten-
sively exploited SOEs in pursuit of economic independence and planned development. To integrate
more closely with international community and follow the global trend of government retreat from
economic activities, Taiwan initiated its privatization program in the late 1980s. Like other gov-
ernments launching privatization programs, Taiwan has generally very optimistic expectations
about its outcomes. However, only few studies in Taiwan were conducted for the performance
effects of privatization (e.g., Chang, 1998). The mixed results generated from small sized sample,
short timeframe and the simplistic approach of directly comparing pre- and post-privatization
performance data without considering business cycles do not fully support the expectation of
policy design and lead even to the controversial interpretation that privatization in Taiwan yield
little performance gain but labor redundancy (Wu, 2003a).
Privatization is known as a complex reform requiring changes in ownership, legal identity,
organization or even strategic orientation. Adding to the intricacy of the privatization process is
the need to simultaneously consider diverse factors shaping the post-privatization environment.
As prior studies have concentrated upon the importance of competition in the product market
and the existence of an active capital market to discipline managerial behaviour (Caves, 1990;
Nellis, 1994; Vickers & Yarrow, 1991), a recent World Bank report (2004) stressed the role of
institutions, such as regulatory quality, property right protection, laws and order, as necessary
conditions for the outcome of privatization.
The importance of fit among functional policies within a business is one of the well-accepted
concepts in management because the match of discrete activities not only affects each other but also
the consequence. As such complementarities are also pervasive in the outcome of privatization,
this study sets out to examine, from the policy-fit perspective, how the firm-level performance
effect of privatization is conditioned by the contextual and organizational settings, including
market openness, continued state presence on boards, and pre-privatization corporate health, each
of which may be the result of a supportive policy designed in concert with ownership transfer.
The analysis of covariance (ANCOVA) is used on a sample of 34 privatization cases in Taiwan
 H.-L. Wu / Journal of Policy Modeling 28 (2006) 281–292 283

between 1989 and 2000. The business cycle is also being controlled by the models so as to
mitigate the impact of downside or upside market movements in the pre- or post-privatization
periods.
The results show that post-privatization market openness and pre-privatization corporate health
are positively related to the efficiency gains, implying the indispensability of market deregula-
tion and SOE reforms in the policy design for government divestiture. Also, the efficiency effect
of continued state presence on boards is moderated by market openness, implying that govern-
ment involvement may be turned into a passive or even benign factor for management decision
making if market competition is introduced. By contrast, state presence on boards become less
critical to efficiency gains in weakly contested markets. From the policy-fit view, this study
addresses the vital role of supportive policies, beyond mere ownership transfer, in the per-
formance outcome of privatization, and adds to the knowledge of the determinants of policy
efficacy.

2. Hypotheses development

A privatized firm’s performance will improve, as theoretically predicted, but the abundant
results of empirical studies on post-privatization performance changes are not yet conclusive,
often contradictory (Cuervo & Villalonga, 2000; Shirley & Walsh, 2001). The variance in the
performance effects of privatization is thus worth more inquiry. However, adding to the com-
plexity of the privatization process is the need to simultaneously consider many diverse factors
that will shape the post-privatization environment. Molz and Hafsi (1997) point out the uneasi-
ness about the actual outcomes of privatization because a comprehensive critical evaluation of
privatization outcomes has never been made. As privatization is often accompanied by changes
in external and internal settings of former SOEs, this section aims to develop a set of testable
hypotheses based on the explanatory power of contextual and organizational variables, including
market openness, continued state presence on boards and corporate health before privatization, on
performance improvement after privatization. Each of them, when accompanying privatization,
may add confounding effects on the post-privatization outcomes.

2.1. The effect of market openness after privatization

Some prior research points out that a privatization policy addressing only the ownership change
without considering measures to introduce competition is unlikely to succeed (Shirley & Walsh,
2001). Privatization plans neglecting competition-enhancing measures are particularly being crit-
icized because private ownership does not guarantee an efficient outcome unless there is vigorous
competition (Caves, 1990).
Although competition per se is thought to influence public-sector performance, Vickers and
Yarrow (1989) argue that its effect relative to ownership is unquantifiable. In the studies empha-
sizing ownership over competition, two types of arguments have been made: one holds that
political interference in SOEs overwhelms competition effects (Shleifer & Vishny, 1994); while
the other believes that inherent difficulties in SOE governance neutralize the benefits of compe-
tition (Boardman & Vining, 1992).
Among those studies supporting that competition matters more than ownership, Kay and
Thompson (1986) contend that a true competition should be combined with a viable threat of exit,
such as a hostile takeover or bankruptcy, otherwise the pressure for managers to raise efficiency
is not in full effect. In observation of the developing countries with pervasive natural monopolies,
284 H.-L. Wu / Journal of Policy Modeling 28 (2006) 281–292

Cook and Kirkpatrick (1988) argue that ownership change without consideration of competition
simply replaces public monopolies with private ones, and that promotion of competition is able
to produce the best results even under continued state ownership.
Despite arguments over the dominance of competition or ownership, the empirical work of
Megginson et al. (1994) show ownership and market structure to act more as complements. La
Porta and Lopez-de-Silanes (1997) also claim that deregulation is interesting as a control since it
may have a large impact on privatization outcomes. In Ramaswamy’s (2001) study on a sample
of 110 firms composed of SOEs and their private counterparts, he regards competitive rivalry
as an indispensable factor when considering the causal relationship between ownership status
and performance. In the same vein, the first hypothesis is not to discern the relative effects of
ownership change and market openness but to address whether efficiency outcome is better under
the alignment of both.
Hypothesis 1. Firms subjected to higher market openness after privatization yield more post-
privatization efficiency gains.

2.2. The effect of continued state presence on boards after privatization

State ownership internalizes the relationship between government and company, and functions
as an institutional alternative to regulation. With regard to its performance implications, the
literature (e.g., Shleifer, 1998; Shleifer & Vishny, 1994) prevalently suggests that governments
are likely to pay more attention to political goals, such as low output prices, employment or
external effects, rather than the profit-maximizing goal.
From the perspective of corporate governance, monitoring by owners represents a solution to the
separation of ownership and control, and may lead owners to write contracts with managers, which
makes salary or continued employment dependent upon performance. However, the problem with
owners’ monitoring is that information asymmetries and sub-goal pursuit may allow managers’
significant leeway in negotiating contracts (Kane, 1999). A more serious monitoring problem is
taken place if ownership is widely dispersed, such as the case of a SOE, where each individual
owner (a citizen) has an incentive to free-ride off the costly monitoring efforts of other owners
(Dyck, 2000).
Since monitoring depends largely on the owners’ identity, it is not surprising that public and
private owners monitor in different ways. Alchain’s work (1965) on the SOE governance argues
that since all citizens can be considered SOE owners, an SOE’s ownership is more widely dis-
tributed than a private firm’s ever could be. Moreover, as there is no way for any single owner to
dispose of his or her share of a SOE, public owners stand to lose more from firm performance
deterioration than do private owners, who can sell their shares. This junction of information and
monitoring failures is noted by Vickers and Yarrow (1989, 1991) and Caves (1990), who argue
that monitoring is particularly weak when ownership is diffuse and information is poor, and that
both situations arise with state ownership.
Megginson et al. (1994) document greater performance improvement for the group of firms
experiencing higher (50% or more) turnover in the board of directors after privatization. In
D’Souza and Megginson’s study (1999), the sample is partitioned into “control privatizations”,
where the government divestment lowers its shareholding to less than 50%, versus “revenue
privatization”, where the government retains majority-voting control. The results reveal the for-
mer with higher performance improvement. The empirical work of Frydman, Gary, Hessel, and
Rapaczynski (1999) also shows that privatization lead to effective restructuring of SOEs only if
 H.-L. Wu / Journal of Policy Modeling 28 (2006) 281–292 285

control rights pass from government into private hands. In a study examining the impact of owner
identity and ownership on firm performance in a sample of the largest European construction
companies, Thomsen and Pedersen (2000) find out that government ownership yields the most
negative influence on firm value when compared to other types of owner, such as institutional
investors, corporate and family ownership.
As both theoretical and empirical evidences argue that state ownership often channels polit-
ical interference into corporate decision making, the chance of performance improvement in a
privatized firm is likely to be weakened if there exists residual state ownership. The degree of gov-
ernment involvement is commonly measured by state-owned shareholding (as in MNR approach),
but Wu (2003a) contends that the presence of government on the board (control rights), rather
than state-owned shareholding (cash flow rights), are more critical to corporate decision-making.
Based on such measurement, the following hypothesis is proposed:
Hypothesis 2. Firms with lower continued state presence on boards after privatization yield
more post-privatization efficiency gains.

2.3. The effect of pre-privatization corporate health

Although privatization’s role in achieving socially beneficial aims has gained theoretical ground
and been supported by the empirical evidence in developed countries, many continue to con-
sider alternatives to privatization (Nellis, 1999; Shleifer, 1998; Shleifer & Vishny, 1994). The
failed privatizations in transition countries, coupled with the apparent success of gradual SOE
reform in China, have added strength to the case for privatization alternatives (Blangiewicz
& Charemza, 1999; Shirley & Nellis, 1991). Megginson and Netter (2001) also suggest that
researchers need to more closely examine the sequencing and staging of privatization, and docu-
ment whether reforms other than government divestiture can effectively serve as a substitute for
privatization.
An early advice from the World Bank was that governments should restructure SOEs prior to
divestment, since governments are better able than private owners to provide private buyers with
a “clean slate” (Nellis & Kikeri, 1989). Muir and Saba (1996) point out that share transferability
has turned out to be a fundamental attribute among successfully reformed SOEs. Other research
examining SOE reform prior to privatization also confirms the necessity of preparing companies
for privatization (Dewenter & Malatesta, 2001; Lopez-de-Silanes, 1997).
As Nellis (1994) once argue that privatization per se should not be considered the panacea
which makes financially distressed SOEs come back to its full health soon after privatization, it
is hypothesized that financial health prior to privatization could lead to greater efficiency gains
after privatization.
Hypothesis 3. Firms in better financial shape prior to privatization yield more post-privatization
efficiency gains.

2.4. The interaction effects of external and internal settings

Cuervo and Villalonga (2000) argue that the observed variance in the effects of privatization on
firm performance cannot be explained without a dynamic consideration of the relevant contextual
and organizational variables. They predict qualitatively that privatization is able to trigger changes
of firm’s internal environment and then brings about performance differentials. Ramaswamy
(2001) proposes a model centering around the interactive effects of ownership and competitive
286 H.-L. Wu / Journal of Policy Modeling 28 (2006) 281–292

rivalry on firm performance. The results of his empirical examination set in India show that
competitive intensity moderates the relationship between ownership and profitability.
Whereas the variance in the performance effects of privatization has rarely been quantitatively
examined, not mentioning the interaction effects of external and internal conditions experienced
by a privatized firm on efficiency gains. From the policy-fit perspective, privatization outcome
grows out of the close match among the contextual and organizational settings, e.g., the intense
competition may restrict state board representatives from pursuing strategies that damage pro-
ductivity, such as preserving employment; a firm’s financial soundness permits it to capitalize on
opportunities of deregulated market and, in turn, to raise performance; a financially healthy firm
may find that having high government presence on board post-privatization reduces management
incentives to raise performance. The following sub-hypotheses are developed for the efficiency
effect of the paired alignment of the three aforementioned predictors.
Hypothesis 4a. The interaction of market openness and government presence on boards signif-
icantly influences the post-privatization efficiency gains.
Hypothesis 4b. The interaction of market openness and pre-privatization corporate health sig-
nificantly influences the post-privatization efficiency gains.
Hypothesis 4c. The interaction of government presence and pre-privatization corporate health
significantly influences the post-privatization efficiency gains.

3. Data

The MNR approach is usually limited to those companies privatized through public share
offerings, which are biased towards large and healthy companies commonly selected as the priority
of a country’s privatization program (Megginson & Netter, 2001). As the scale and the scope of
Taiwan’s privatization is far smaller than some advanced countries or transition economies which
have been frequently cited for empirical research, all entities transferred to the private sector
regardless of methods (e.g., share sales, asset sales, asset as equity contribution and employee
buyout) in Taiwan during 1989–2000 are included in the study inasmuch as they could continue
to generate post-privatization financial and accounting data directly comparable to that in the
pre-privatization period. As a single-country empirical study, this study has the advantages of
accessing to consistent data and of avoiding the bias of comparing accounting data generated in
different institutional settings.
Most of the Taiwan’s privatization cases have three-year observation before and after its pri-
vatization, four were privatized after 2001 were thus excluded due to the lack of comparable
post-privatization data. The criteria yield 30 privatized firms and 4 sold out business units across
four industrial sectors (manufacturing, transportation, financial services and others). Proxy vari-
ables are computed from the prospectuses or annual reports obtained from the publicly listed firms
as well as from supplemental sources in the Taiwan Securities & Futures Information Center; data
of others refer to the archives of the Council for Economic Planning and Development, a think
tank in the Taiwanese Cabinet responsible for overseeing Taiwan’s privatization programme.

3.1. Variable definitions

The dependent variable used in this study is the efficiency gains calculated by the improvement
of labor productivity from the pre- to post-privatization periods. The efficiency indicator, measured
 H.-L. Wu / Journal of Policy Modeling 28 (2006) 281–292 287

as the logarithm of the ratio of inflation-adjusted sales to employee-hour, provides an intermediate

range of comparisons that are relatively well insulted from extraneous effects such as administered
market dominance, output prices and social costs, and addresses the theoretical ground of SOE
versus privatized performance differentials that focus on the efficiency dimension. Following the
MNR approach, this study develops a “time-line” of dependent and predictor variables for all
samples over the 3-year pre- and post-privatization windows.
All three predictors to the efficiency gains are treated as dichotomous variables for the
ANCOVA models. Market openness is measured by the Hirschman–Herfindahl Index (HHI)1
of market concentration, and the proxy variable representing the degree of market competition is
coded “1” if the averaged HHI of the industry of a given sample in the post-privatization period is
smaller than that in the pre-privatization period (implying high market openness) and “0” other-
wise. State presence is measured by the proportion of board members appointed by government
and other SOEs in the post-privatization period. This proxy variable for government involvement
is coded “1” if the percentage is over 50% (implying high state control power on the board) and
“0” otherwise. Corporate health is measured by the financial soundness in terms of the return on
equity (ROE) in the pre-privatization period. It is coded “1” if the averaged ROE of a given sample
in the pre-privatization period outperforms the corresponding industry average and “0” otherwise.

3.2. Control variables

In numerous MNR studies on the performance effects of privatization, most compare pre-
versus post-privatization performance of selected privatized firms without adjusting for relative
market movements. Few studies doing so obtain different results from those which do not, e.g.,
Martin and Parker (1995), examine whether 11 British firms privatized during 1981–1988 improve
profitability and efficiency after privatization. After adjusting for business cycle effects, fewer than
half of the firms perform better after being divested. La Porta and Lopez-de-Silanes (1997), using
data of 218 non-financial privatizations in Mexico, find that macroeconomic and industry factors
can account for up to 20% of the increases in post-privatization sales.
Accordingly, the absolute measurement of efficiency gains should be controlled by the fluctua-
tion of industry-wide conditions to reflect objectively the real productivity changes. The industry
average, encompassing all comparable firms in the industry with the same four-digit standard
industrial classification code when a given sample firm being considered, is calculated in the
same time window for each sample. The approach of the relative performance is conducive to
mitigating the bias of industry disparity and relative market movements. Firm size, as the other
control variable, is measured as the logarithm of the averaged annual sales of each sample firm
in the post-privatization period.

4. Results

Table 1 presents descriptive statistics and the correlation matrix for all measured variables. The
likelihood of multicollinearity is also checked as no pair of dependent variables has a high enough
correlation coefficient to consider it to be a serious issue (by the standard of the cut-off of 0.5).

1 The HHI is a measure of the size of firms in relationship to the industry, and an indicator of the amount of competition

among them. It is defined as the sum of the squares of the market shares of each individual firm. As such, it can range
from 1 (=100%2 ), a single monopolistic producer in the industry, to a small figure when a very large amount of small
firms in the industry.
288 H.-L. Wu / Journal of Policy Modeling 28 (2006) 281–292

Table 1
Descriptive statistics and correlation matrix
N = 34 Mean S.D. 1 2 3 4 5 6

1. Efficiency gain 0.193 0.420 1.000

2. Market openness 0.526 0.506 −.271 1.000
3. State presence 0.632 0.489 .111 .368 1.000
4. Corporate health 0.526 0.506 .094 .156 −.069 1.000
5. Firm size 7.267 1.174 −.203 .189 −.047 −.187 1.000
6. Industry-wide 0.153 0.163 .447 −.329 −.382 −.150 −.103 1.000
efficiency changes

In bold, correlation is significant at the 5% level (two-tailed).

Table 2
Analysis of covariance: efficiency gains of Taiwan’s privatized enterprises
N = 34 Model 1 Model 2 Model 3 Model 4

Main effect (univariate F)

Market openness (M) 8.982*
State presence (S) 4.563
Corporate health (H) 6.859*
M×S 6.605*
M×H 9.532**
S×H 2.776
Covariate model (standardized estimates)
Intercept 0.555 0.511 0.419 −0.032
Firm size −0.059 −0.047 −0.036 0.016
Industry-wide efficiency changes 1.187* 1.426** 1.166* 1.292*
Multivariate F 5.066** 3.450* 4.545** 4.15**
Adjusted R2 (%) 28.6 14.2 23.3 42.4
* Significant at the 0.05 level.
** Significant at the 0.01 level.

Table 2 shows the results of four ANCOVA models.2 Firm size and industry-wide efficiency
changes act as two covariates controlling for the variance of dependent variable. As expected,
industry-wide efficiency changes is positively related to the efficiency gains. Models 1 through 3
are to test the main effects of three predictor factors (market openness in Model 1; government
presence in Model 2 and corporate health in Model 3). Model 4, also known as the MANCOVA
model, aims to test the interaction effects of the three factors. All four models are significant by
the F-statistic ranging from 3.45 to 5.066 with adjusted R2 from 14.2% to 42.4%.
The results of Model 1 show that market openness serves as a significant determinant to the
post-privatization efficiency gains (F = 8.982, p < 0.05). As shown in the lowest row of Table 3,
the difference in the post-privatization efficiency gains between high and low market openness is
0.047, significant by the pairwise t-test (p < 0.05), giving support to Hypothesis 1.

2 In experiment designs, ANCOVA is commonly used to remove the effects of covariates which may intertwine with

the relationship of the categorical predictors and the continuous dependent. It is thus adopted by this study to test the
main and interaction effects of three predictor variables, controlling for the effects of industry-wide efficiency changes
and firm size.
 H.-L. Wu / Journal of Policy Modeling 28 (2006) 281–292 289

Table 3
Variations in post-privatization efficiency gains by market openness/government presence clusters
Efficiency gains (the number of sub-sample) Market openness Means comparisons (pair-wise t-test)
high vs. low state presence
High Low

State presence −0.036

High 0.236 (8) 0.162 (16)
Low 0.216 (10) 0.242 (4)
Means comparisons (pair-wise t-test) 0.047* 0.193 (38)
high vs. low market openness
* Significant at the 0.05 level.

Table 4
Variations in post-privatization efficiency gains by market openness/financial health clusters
Efficiency gains (the number of sub-sample) Market openness Means comparisons (pair-wise t-test)
high vs. low financial health
High Low

Financial health 0.057*

High 0.232 (12) 0.206 (9)
Low 0.194 (6) 0.148 (11)
Means comparisons (pair-wise t-test) 0.047* 0.193 (38)
high vs. low market openness
* Significant at the 0.05 level.

It appears that Hypothesis 2 is not supported by the results in the Model 2 (F = 4.563, p > 0.05),
showing that government presence on boards seems unrelated to the post-privatization effi-
ciency gains. Model 3 captures the effect of pre-privatization corporate health on the efficiency
gains, showing that financial soundness before privatization influences significantly the efficiency
improvements after privatization (F = 6.859, p < 0.05). As shown in the right-hand column of
Table 4, the difference in the post-privatization efficiency gains between high and low financial
health before privatization is 0.057, significant by the pairwise t-test (p < 0.05), giving support to
Hypothesis 3.
Model 4 sheds further light on the interaction effects of all predictor variables. It appears that
the alignment of market openness/government presence (F = 6.605, p < 0.05) and of market open-
ness/financial health (F = 9.532, p < 0.01) influence significantly the post-privatization efficiency
gains. Variations in post-privatization efficiency gain by market openness/government presence
clusters are shown in Table 3. When interacting with market openness, continued government
presence acts in a different way: in the context of high market openness, privatized firms with
high state involvement achieve more efficiency gains than those with low state involvement. By
contrast, high state presence on boards yields less efficiency gains when subjected to low market
openness. Considering the significance of the F-test in Model 4 and Scheffe post hoc test,3 the
study supports Hypothesis 4a.
The other interaction pair with statistical significance in Model 4 is regarding market openness
and pre-privatization corporate health, both of which directly affect on efficiency gains (as shown

3 Scheffe test is adopted in this study to perform simultaneous joint comparisons for all possible pairwise combinations
of means. By using the F-sampling distribution, all linear combinations of four group means shown in Tables 3 and 4 are
examined.
290 H.-L. Wu / Journal of Policy Modeling 28 (2006) 281–292

in Models 1 and 3). Table 4 shows the variations in the post-privatization efficiency gain by
market openness/financial health clusters. Although both market openness and pre-privatization
financial health serves as important determinants of efficiency gains, corporate health prior to
privatization yields more productivity gains in the situation of high market openness. Along with
the significance of the F-test in Model 4 and the Scheffe post hoc test, the study supports Hypothesis
4b.

5. Policy implications and recommendation for future studies

Using data of Taiwan’s 34 privatization cases, the ANCOVA models in this study show that
both post-privatization market openness and pre-privatization corporate health contribute to the
efficiency gains of privatization, and that state presence on boards and SOE health, when in tandem
with market openness, cause efficiency differentials.
Regarding the effect of market openness, Britain’s privatization experience in the utility indus-
tries produced the outcome with government’s deliberate curbs on competition and led to the
accusations of poor quality and low productivity (Vickers & Yarrow, 1989). This study confirms
the inseparable effects of privatization and market openness on the post-privatization efficiency
gains. As incentive and pressure inflicted by market competition over managers may conduce
to better performance after privatization, it is suggested that mere changes in ownership cannot
ensure the successful outcome in terms of efficiency gains, and that government should align its
privatization program with more efforts on promoting market liberalization. Overall, the own-
ership advantages of privatization become less critical in weakly contested markets but become
relevant when competitive rivalry is introduced.
Regarding the effect of pre-privatization SOE health, it is controversial whether or not govern-
ments should inject budgets into financially troubled SOEs in the run up to privatization. Despite
many believe that ownership change might solve all the problems (Wu, 2003b), my finding shows
that a SOE’s financial soundness prior to privatization is positively associated with the efficiency
gains after privatization, especially in the context of high market rivalry. It implies the indispens-
ability of SOE reforms, leading to financial health of loss-making SOEs, before privatization.
Though it may be a result of the protected market position, SOE health is rather a sign of manage-
rial competence and strategic posture, both of which, if brought back in order through corporate
reforms prior to privatization, will unlock more efficiency gains after privatization. Despite the
study cannot quantify the effect of pre-privatization financial health relative to that of privatization,
it supports that SOE reforms, acting in concert with ownership changes, yield more efficiency
gains in the post-privatization period.
Although the efficiency effect of government presence on boards is not found by this study,
the interaction of government involvement and market openness hold the key to understanding
a different role of continued state involvement. Residual state ownership may yield a relatively
strong control power in a dispersed ownership structure after privatization, but political inter-
ference from the legislative branch, believably a main cause of SOEs’ inefficiency,4 has been
fended off to a great extent in Taiwan. The post-privatization government presence on boards

4 According to the Budget Law in Taiwan, the legislative branch of government (the Parliament) is entitled to the
constitutional right of approving the budgets of the central government and affiliated SOEs. Legislators are inclined to
exploit their power to interfere with the operations and goal-setting of SOEs. Many scandals taken place in SOEs are
reportedly caused by legislators’ lobby and boycott in their own and constituents’ interests. However, the Parliament’s
right related to a SOE’s budgets is revoked after its privatization.
 H.-L. Wu / Journal of Policy Modeling 28 (2006) 281–292 291

has been thus turned into a passive or even benign factor under high market openness (e.g., non-
commercial goals are removed; management decision-making can be focused and shielded from
hostile takeovers). In addition, government presence in terms of board directorships may offer a
privatized firm with a close connection with government, yielding greater institutional knowledge
over those with no or weaker such ties. However, the contribution of state presence to reducing
institutional and managerial uncertainties becomes less critical in weakly contested markets.
This study provides a policy-fit view on performance implication of privatization but pos-
sibilities for further research remain. First, defining performance yardsticks for the efficacy of
privatization policy has long been argued. The social objectives and other dimensions of economic
objectives of SOEs can be factored into further assessment of privatization outcomes since SOEs
are typically not set up to deliver the same financial or operating results when transformed into
private enterprises. Second, due to the relative small scale of Taiwan’s privatization, a country-
specific quantitative analysis is constrained by both sample size and timeframe. Therefore, the
approach of this study can be extended beyond the country settings. As more samples in contrast-
ing nature are included, the findings are more generalizable. Third, although institutional factors
relating to law and order, government quality and protection of property rights did not appear
obviously to vary in Taiwan in the sample period studied and were therefore not included in the
study, future research might be able to identify and include other institutional variables significant
to the post-privatization environments.

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