THE WILLIAM DAVIDSON INSTITUTE AT THE UNIVERSITY OF MICHIGAN BUSINESS SCHOOL Enterprise Restructuring and Firm Performance: A Comparison of Rural and Urban Enterprises in Jiangsu Province

We examine the contrast in the experience of ownership reforms between urban SOEs and rural TVEs using a panel of industrial enterprises in Nanjing municipality for the period from 1994 to 2001. Our objectives are twofold. First, we study how the reform program of “grasp the large and let go of the small” has been carried out in practice by comparing the patterns of enterprise restructuring in the SOEs and the TVEs. Second, we investigate how the alternative reform strategy has affected firm performance in terms of the growth of labor productivity, total factor productivity (TFP), profitability, and worker earnings. We find a sharp contrast in the reform strategies of the SOEs and TVEs in two respects. First, the changes in the SOE sector were more gradual and involved more limited transfer of property rights than did the reform of the TVEs. Secondly, the reforms in both sectors exhibited selection bias but in opposite directions, with worse performing ones being the principal targets of reforms, among SOEs, and better performing enterprises being more likely to be picked for privatization, among TVEs. Our analysis discerns strikingly strong, robust positive effects of ownership restructuring on the growth of labor productivity, TFP and profitability in the reformed SOEs, indicating that the evolutionary reform policy for the SOEs has successfully reversed the trends of declining productivity and profits in these enterprises in Nanjing. We also find that among reformed urban enterprises, those in which private ownership accounts for less than 50% of shares performed better than those in which the majority of shares are owned privately. We find mixed evidence for the TVEs: privatization had no effect on firm performance in a group fixed-effects model but significant, positive effects in a firm fixed-effects model.