The impact of privatization of state-owned enterprises on innovation in China: A tale of privatization degree

Despite the massive privatization of state-owned enterprises (SOEs) in China, its impact on firm innovation remains poorly understood. Prior literature fails to capture some significant phenomena because it inappropriately measures SOE privatization as a dummy variable, which, in actuality, should be measured by “degree”. Using a unique Chinese Patent Census Database (1991–2018) to identify patent quality, we systematically investigated the impact of SOE privatization (as measured by privatization degree) on innovation (as measured by both patent quantity and quality). We found that first, SOE privatization significantly promotes innovation and has greater effects over the long term, mainly through reduced agency costs of firms. Our findings provide empirical support for the ongoing privatization of SOEs in China, and validates the managerial view of SOE theory. Second, unlike previous studies that only considered whether SOEs were privatized or not, we considered the degree of SOE privatization and obtained two novel findings: SOE privatization only promotes innovation when privatized firms are controlled by domestic non-state-owned capital, and progressive privatization benefits innovation more than radical privatization does. These findings reveal the preferred path and rate of SOE privatization. Third, the promotional effects of SOE privatization on innovation are greater for commercial SOEs, central SOEs, large SOEs, and SOEs in high-tech industries compared with their respective counterparts. These findings provide guidance for the different strategies for the privatization of various SOEs. [Display omitted] •SOE privatization is measured by “degree”, rather than as a dummy variable.•SOE privatization promotes innovation and has greater effects over the long term.•This occurs only for privatized firms controlled by domestic non-state-owned capital.•The positive effects are mainly the result of reduced agency costs.•Progressive privatization benefits innovation more than radical privatization.