An Empirical Comparison of Commercial Profitability in the Private and Public Sector in India: Identifying the Effect of Competitive Intensity
KANNAN RAMASWAMY AND WILLIAM RENFORTH
This chapter compares the relative profitability of state-owned enterprises and privately owned firms in the Indian manufacturing sector. Using a matched pair design, the results show that private sector firms clearly out- performed their public sector counterparts. However, these profitability differences seem to be accentuated when competitive intensity is high and are minimized at lower levels of competition. This suggests that competitive intensity moderates the relationship between ownership status and commercial profitability. Consequently, industry competitive market structure must be considered when evaluating the effects of ownership form on performance.
Sweeping economic reforms are transforming the economic landscape of developing countries worldwide. Countries such as India, Pakistan, Bangladesh, Nigeria, Sudan, Chile, Argentina and Venezuela are implementing a variety of initiatives to hasten the transformation of historically regulated economies into free market systems. Privatization is one such initiative that is envisioned as a viable means of revitalizing poor performance economies. This trend builds in part on the experiences of developed countries such as the United Kingdom, Canada and Sweden that privatized substantial segments of their state-controlled industries. It also stems from general disillusion with the politicized management of state-owned enterprises (SOEs), the anemic financial performance of the public sector and significant changes in external political and economic conditions ( Baer and Birch, 1992; Bhaya, 1990; Shirley, 1989; Vickers and Yarrow, 1988). Confronted with the generally disappointing performance of SOEs and the dire