Fact of the Week: Former Chinese State-Owned Enterprises Produce More Patents than Current SOEs but Still Lag Private Firms

January 28, 2019

(Ed. Note: The “Innovation Fact of the Week” appears as a regular feature in each edition of ITIF’s weekly email newsletter. Sign up today.)

Former SOEs in China produce 26 percent more patents than current SOEs but still lag firms that were never state-owned.

Source: Ann Harrison et al., “Can a Tiger Change Its Stripes? Reform of Chinese State-Owned Enterprises in the Penumbra of the State,” NBER Working Paper No. 25475, National Bureau of Economic Research.

Commentary: It is well established that state-owned enterprises (SOEs) are less profitable and innovative than private firms as they have only soft budget constraints, being able to rely on government assistance if they are not profitable. Recognizing this, China relinquished control of many SOEs beginning in the late 1990s, but still gives former SOEs easier access to loans and favors them in allocating subsidies. A new study analyzed the impacts of this, observing Chinese enterprises’ performance between 1998 and 2013.

Before the financial crisis of 2008, former and current SOEs had similar returns on assets, but they have diverged since then such that former SOEs have seen returns 1.7 percentage points higher than current SOEs. By comparison, firms that were never publicly owned have seen returns 5.8 percentage points higher. Former SOEs performed better on measures of productivity like patenting, where they are 26 percent more likely to file a patent than current SOEs, compared to 30 percent for fully private firms. The study estimates that if the Chinese government did not consider prior ownership of private firms, former SOEs would increase their return on assets up to 113 percent and engage in up to 10 percent more patenting.