Privatization, Foreign Acquisition, and Firm Performance: A New Empirical Methodology and Its Application to Hungary

By Iwasaki, Ichiro; Szanyi, Miklos et al. | The European Journal of Comparative Economics, December 2010 | Go to article overview

Privatization, Foreign Acquisition, and Firm Performance: A New Empirical Methodology and Its Application to Hungary


Iwasaki, Ichiro, Szanyi, Miklos, Csizmadia, Peter, Illessy, Miklos, Mako, Csaba, The European Journal of Comparative Economics


1. Introduction

The privatization of public enterprises is becoming increasingly common throughout the world due to the globalization of market principles. This process began in the West with the U.K. as it adopted a denationalization program under the leadership of Margaret Thatcher, and it then spread to other industrialized states and developing countries. At the end of the 20th Century, when state socialism came to an end, privatization became an overriding trend in the international political and economic arena. The perception of the boundary separating public and private enterprises has changed considerably in the last 20 years. The denationalization process has grown steadily, even in such sectors as post services and social securities services, which were once believed to be traditional state-run businesses.

The philosophical foundation of the widespread privatization of public enterprises currently observed in many countries lies in the high degree of trust in the overwhelming advantage of private over public ownership in terms of efficiency. Many citizens now expect that the transfer of public firms to private owners could alleviate the financial burden of the state as well as significantly improve the management efficiency of privatized firms themselves, remarkably contributing to the betterment of society. Accordingly, it has become an important subject of contemporary economics to ascertain whether such an expectation is feasible. In response to this demand, many studies pioneered by Megginson et al. (1994) and Boubakri and Cosset (1998) have been conducted, which repeatedly verified the positive change in firm performance before and after privatization through case analyses of industrialized and developing countries. Furthermore, it is almost certain that the effect of privatization was observed in enterprise privatization in the post-communist states. In fact, reviewing the recent literature on privatization in transition economies, Estrin et al. (2009) conclude that the effect of privatization has been mostly positive in Central and East European countries (CEECs). In contrast, it has been negligible or even negative in the Commonwealth Independent States. Nevertheless, privatization to foreign owners resulted in considerable improvement of the performance of former state-owned enterprises (SOEs) virtually everywhere.

On the other hand, however, most previous studies fall short in identifying whether these effects are due to the privatization process itself or to other factors (Omran, 2004). Furthermore, many studies focusing on the effect of a new ownership structure on a firm's performance following privatization fail to identify a statistically significant relationship between the two elements. This is particularly so for studies covering transition economies (Dewenter and Malatesta, 2001; Harper, 2002; Megginson, 2005; Aussenegg and Jelic, 2007). Therefore, despite the strong belief of economists in the superiority of the private sector over the state regarding ownership structure, no empirical study on privatization has presented a definitive conclusion regarding this point.

Using annual census-type data of Hungarian enterprises for the early 2000s, we analyze the impact of ownership transformation from the state to the private sector on firm performance in the post-privatization period. Unlike the early transitional period, which witnessed an economic crisis triggered by the collapse of the COMECON system and large-scale institutional changes leading toward a market economy, the early 2000s is a suitable time to investigate the relationship between the privatization and firm performance in Hungary because of the stability of the social and economic circumstances and the legal system at the time. Furthermore, as explained later, the data we employ cover almost all business firms, including SOEs, therefore ensuring the representation of the Hungarian corporate sector. …

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