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Development Policy and International Relations

State-Owned Enterprise: Industrial Development Policy and National Security


By Khov Ea Hai, June 27, 2013

Phnom Penh: The article is combined from various sources of reliable information in order for providing the important understanding on State-Owned Enterprises (SOEs) related to particular countries’ experience on Industrial Development Policy. Although the trend of strategising and implementing these SOEs may have changed as it is evolved from time to time, but it still remains on the top of state’s priority list. There is a clear role for government to play in this sense since some cases private sectors cannot fulfil in a competitive market, but the government. This is because there are also some crucial sectors that government significantly takes control over as they are highly relevant with the survival of nation, stability and security. Therefore, state would not likely tend to privatise number of sectors, provided for the economic reasons in order for boosting its economic performance during the uncertainty of global economy. Although it is true that state privatise some sectors, but still it remains on large shares of them, e.g. its shares could be more than 51%.  Another essential corner is that State would use them as the strategic tool in its implementation on public policy. However, there are also great challenges involved with this kind of things. In this respect, SOEs reform need to be addressed in very insightful manner.

Rather than putting everything here, the following only presents the key and basic ideas which are usefully explaining on SOEs and countries’s experiences.

  1. Overview

State-Owned Enterprise (SOE): is a business that could be either wholly or partially owned and operated by a government. SOEs are often prevalent in utilities and infrastructure industries, such as energy, transport and telecommunication, whose performance is of great importance to broad segments of the population and to other parts of the business sector.

State-Owned Enterprises use a distinct legal form and have a commercial activity, whether or not they pursue a public policy objective as well. These SOEs may be in competitive or in non-competitive sectors of the Economy.

In several OECD countries, State-Owned Enterprises still represent a substantial part of GDP, employment and market capitalisation.

  • Consequently, the governance of SOEs will be critical to ensure their positive contribution to a country’s overall economic efficiency and competitiveness.[1]

Never mind whether this was ever truly so black and white—Western countries certainly had their share of state-owned businesses back in the 1970s—but what is clear is that times have changed.

  • Liberalization of markets in many former Communist countries has fundamentally changed how companies operate and how government invests in them.

2. Practicing SOEs

In a new working paper of Insper Institute of Eduction and Reseach in São Paulo, Brazil, the attempt to tease out some of the distinctions that exist in SOEs today, and propose under what circumstances they might be advantageous or even desirable in the marketplace.[2]

Over the past several decades, thousands of companies have been privatized in both the developed world and emerging markets. (in 2013)

  • While every company in the former Soviet Union was once state-owned, now only several thousand businesses fit that description.
  • China has gone from hundreds of thousands of state-owned businesses down to around 20,000.
  • Meanwhile, developed countries including Australia, Canada, France, Japan, and the UK have each gone from hundreds to dozens of companies that are either completely or partially controlled by government.[3]

More than just the decline in the number of state-owned companies, however, is the way they are structured.

  • “Some of the largest state-owned enterprises are becoming almost like private corporations,” says Musacchio.
  • “They are traded in stock exchanges and have boards of directors, maybe even with external managers. We haven’t always understood these changes.”[4]

What they found is that while the number of state-owned firms has decreased overall, the number of truly important state-run companies, such as oil and telecom firms, national defense, diplomatic service, and public infrastructures, have remained steady. It is because those sectors related to economic performance, strategic interest and national security.

Moreover, while private companies may work well in countries with well-developed capital markets, countries without a robust sector for private investment can actually benefit from state investments, providing certain conditions are met.

  • “In Western markets that had more thorough privatization programs, the stock markets developed more, and it became less necessary for government to prop up companies financially.
  • In most emerging markets, the failure in capital markets persists, so the government is trying to correct that market failure by investing in minority stakes in private companies or lending at subsidized rates to such firms.”

2.1. SOEs in China

When people think of Chinese state companies, they often have its giant banks or oil companies in mind. But most of the 155,000 enterprises still owned by the central and local governments [5]

According to Xinhua, at the end of 2011, there were 144,700 state-owned enterprises with total assets of 85.4 trillion yuan, revenues of 39.25 trillion yuan, and profits of 2.6 trillion yuan (43 percent of China’s total industrial and business profit) [6]

Most SOEs are controlled by local governments, though it is those in the care of the central government that receive the most attention. Of those companies, there are three categories:

  • Those controlled by the State-Owned Assets Supervision and Administration Committee (SASAC),
  • Banking and finance organizations, and
  • “Media, publications, culture and entertainment companies,” administered by other agencies.[7]

Recently, SOE profitability has taken a hit, reports this May Xinhua article: in the first quarter of 2013, SOEs reported 5.3 percent growth, compared to 2012’s first quarter growth figure of 7.7 percent.[8]

Overall SOE profits are largely supported by just a few massive SOEs, such as PetroChina and China Mobile, according to China Economic Review, that are able to reap substantial profits by way of their “monopoly positions.”[9]

In some industries, SOEs are granted a monopoly, with private enterprise not allowed to participate, especially in sectors related to national security.

  • As the Wall Street Journal comments, “Beijing frequently justifies the state’s grip on key companies that form the “commanding heights” of the economy – like energy, power, steel, telecoms and shipbuilding.”

The meteoric rise of SOEs, combined with the spectacular economic growth of China, has made the future of SOEs in China an issue of global importance. The success and sustainability of China’s SOEs has been vigorously debated both within China and internationally.

Indeed, SOEs have come to dominate several key global industries and are the backbone of the Chinese economy (which is on course to become the world’s largest economy). [10]

In fact, very recently, the Chinese government decided that by 2020 the Singapore GLC Model would be replicated in China 30 times over—making this proposed reform potentially one of the most important corporate governance initiatives of our time.

2.2. SOEs in Singapore

In 1960, a year after Singapore attained full internal self-governance, it had a GDP per capita of US$428 that was close to the world average and faced significant challenges. Today, Singapore is one of the richest countries in the world. With virtually no natural resources, effective governance has been the key to Singapore’s success.

Singapore’s corporate governance system is built almost entirely on companies owned by concentrated block-shareholders. In fact, over 90% of Singapore’s public listed companies have block shareholders who exercise controlling power.[11]

  • Empirical evidence suggests that as Singapore’s wealth has increased, its concentration of shareholdings has also increased—the opposite of what proponents of the American corporate governance model would predict.
  • Shareholder-centric model, is that listed companies in which the government is the controlling shareholder (Government-Linked Corporations -GLCs- were set up in sectors lacking private enterprises. E.g. ship-building, air transport, shipping and development banking ) account for 37% of the total stock market capitalization in Singapore. As such, the Singapore government is by far Singapore’s most powerful shareholder.
  • In this light, the initial attraction of Chinese Communist Party officials to the Singapore GLC Model appears obvious—it provides a highly successful model in which the government remains the linchpin of corporate governance and the economy.

Perhaps even more attractive to Chinese Communist Party officials, however, is the evidence that on a micro-economic level the Singapore GLC Model appears to produce strong corporate performance and promotes good corporate governance—something which has tended to elude Chinese SOEs.

Interestingly, this study also found that GLCs in general managed their expenses better than non-GLC companies.

  • The lower expense-to-sales ratio among GLCs indicated that GLCs were more profitable because they ran leaner operations.
  • Such a finding demonstrated that GLCs in Singapore were different from the generally inefficient nationalized firm run by governments.
  • GLCs contributed to 13% of GDP in 2002 and is expected to contribute less than 10% since 2011[12]

The establishment of GLCs was an important part of the country’s industrialization plan. In Singapore, competent economic management had a strong correlation to political legitimacy and survivability. Although these conditions are not entirely unique to Singapore, a detailed analysis reveals that they are distinctive enough to call into question whether the Singapore GLC Model is easily transplantable.

With GLCs seen as an important engine in the development of the Singapore economy, the main method chosen by the government to exercise control over GLCs when civil servants ceased to manage such companies was the appointment of top civil servants to the boards of these companies.

  • These civil servants serve a monitoring function but otherwise government control is very loose.
  • The government makes no attempt to appoint managers or other personnel to manage the companies and normally does not interfere in the management of GLCs.
  • The boards of GLCs are policy boards rather than functional (managerial) ones.

2.3. SOEs in South Korea

During the period of rapid economic development in South Korea from the 1960s to 1970s, state-owned enterprises (SOEs) or public enterprises played a critical role in the economic growth of the nation.

  • SOEs invested in the kind of infrastructure, including Social Overhead Capital (SOC), where the private sector had difficulty in justifying an investment.
  • At that time, SOEs were completely under the control of the State bureaucracy. The sole purpose was industrial development.
  • There was no transparency or participation; their activities were out of sight and out of control by the public.

There are five stages in the development of SOEs in Korea:

  1. Stage 1 (Aug 1948 to July 1962):
  • SOEs mostly reverted from Japanese colonial ownership to control by the Korean government.
  • The main roles of SOEs during this period was to take responsibility for developing the infrastructure.
  • SOEs were managed through decentralized control by each of the line ministries.

B. Stage 2 (Aug 1962 to Feb 1984):

  • SOEs were actively used as a means of economic development in line with the first Five-Year Economic Development Plan.
  • SOEs underwent quantitative expansion and quality improvement, and the Korea government adopted a government-led strategy.
  • Aiming at rapid growth, the government supported industrial policies that protected or promoted certain industries, based on the logic of “economies of scale” and “economies of scope.”
  • In line with this policy, public enterprises were established as tools for such economic development strategies and industrial policies.
  • There were two kinds of control mechanisms; budget and management.

C. Stage 3 (March 1984 to Jan 1999):

  • The enactment of the Framework Act on the Management of Government Invested Institutions of 1983
  • An overhaul of the management structure and an evaluation system for management were sought to provide the foundation for the establishing an autonomous and accountable management system for Government Invested Institutions.
  • the government made attempts to reform and renovate the public enterprises.
  • The most important of these steps was the introduction of the performance evaluation for public enterprises.

D. Stage 4 (Feb 1999 to March 2007):

  • In order to establish an accountable and responsible management system, the “CEO management contract system” was introduced while the “management publication system” and the “minority shareholder protection system” were also established to enhance management transparency and allow public scrutiny.
  • the Kim Dae-jung Administration, the so-called “radical presidency,” implemented the privatization policy as part of public-sector reforms in the aftermath of the financial crisis of 1997.
  • Plans for Management Reform and Privatization of State-Owned Enterprises aimed at “improving the management efficiency of State-Owned Enterprises by introducing competition principles and establishing accountable management.”[13]

E. Stage 5 from then onwards:

  • It firstly attempts to reform the classification system of all public institutions, including existing SOEs and subordinate institutions.
  • Moreover, it aims to reform external and internal governance structures. So the decision-making system was changed dramatically.
  • Finally, transparency, accountability, and participation were emphasized.

2.4. SOEs in Japan

‘Zaito’ is the popular Japanese abbreviation for the Fiscal Investment and Loans Program (Zaisei Toyushi Keikaku), which functions as the ‘main bank’ for state-owned enterprises (SOEs) in Japan. Here it will be referred to the Japanese public credit program simply as “Zaito.”

  • There are many corporations that are engaged in policy-based activities outside the government. Such activities include road construction, housing finance, export credit, urban development and so on.

The government has provided capital to most of these corporations. Government ownership is normally more than 50 percent, and 100 percent in the case of the important ones.

Among the SOEs, those that raise funds through the Zaito system are specially called the “Zaito
institutions.” Most of the Zaito institutions are 100 percent government-owned corporations.

  • They were 42 (37 Public Corporations and 5 Authorized Corporations) at the end of March 1999, and will decrease to 38 (33 and 5) at the end of March 2000. The Zaito institutions finance their activities mainly in two ways.
  • As of the end of March 1999, they raised 266.1 trillion yen (about 2.6 trillion dollars) in loans from the Zaito system and 12.8 trillion yen (about 128 billion dollars) by receiving capital from the government.

The Zaito system is a part of the government that acts as a ‘main bank’ for the typical Japanese SOEs. The system serves as a financial intermediary for the implementation of fiscal policy by pooling public funds (such as postal savings deposits and pension funds) and allocating them to certain SOEs, such as the Government Housing Loan Corporation for housing loans.

  • The Zaito system fulfils the dual fiscal policy functions of allocating resources and countering economic cycles as a back up to the market mechanism through management of the funds collateralized by future cash flows with a view to facilitating appropriate government policies.

Resource allocation: In a free economy, resource allocation is largely left to the market.

  • However, there are two types of goods and services that are necessary for people’s daily lives but are not likely to be supplied by private sector activities within the market mechanism or not to be supplied in sufficient quantity.
  • The first is goods and services such as national defense, diplomatic service, and public roads that are provided uniformly to all citizens. Because the receipt of such services by some people does not affect the services that others can receive and free riders cannot be excluded, there is no alternative but to use tax resources to pay for such services.
  • The market also fails to appropriately supply such goods and services that generate great external effects. These include social capital, such as expressways that provide convenience to people of an entire region, and the development of new energy resources which requires enormous investment that cannot be recouped quickly enough to attract the private sector.
  • The Zaito system helps to allocate resources to the supply of such goods and services by providing long-term, fixed-interest funding that private financial institutions would not.

Counter-cyclical policy: Fiscal policy is expected to reduce the effect of economic fluctuations when they are too large for the market mechanisms to handle alone.

  • Such a function operates through built- in stabilizers such as a progressive tax or social welfare system and through quantitative means such as expanding and contracting the scale of the fiscal system and raising and lowering taxes.
  • The Zaito system functions as a tool of quantitative fiscal policy. It is a financial mediation system linking sources of government funding (such as postal savings deposits and pension funds) with fund provision (such as housing loans from the Government housing Loan Corporations) by independent contracts.
  • Like banks, it also serves as a financial intermediary by providing a bridge for time lags or mismatches between changing supply and demand flows. Moreover the Zaito system provides a buffer to allow the provision of funds to match economic conditions. In this way it performs a flexible and efficient counter-cyclical function. [14]

3. State-Owned Enterprise as the Government’s Tool

Over the years, the rationale for state ownership of commercial enterprises has varied among countries and industries and has typically comprised a mix of social, economic and strategic interests.

  • Examples include industrial policy, regional development, the supply of public goods and the existence of so called “natural” monopolies.
  • The state can benefit from using tools that are applicable to the private sector.

Authorities could also promote their use by sub-national levels of governments that own enterprises. They are also useful for non-commercial SOEs fulfilling essentially special public policy purposes, whether or not in a corporate form.

In addition, businesses in which the government is a majority shareholder may be more suitable for countries that recognize a “double bottom line” where compelling social interests—such as energy security, economic development, or job creation—are recognized to be just as important as profit.

  • There’s a trade-off, however, as it can open the door to minority investors taking a hit, say as when a government-owned company holds down the price of gasoline in order to benefit voters, but depresses profits for the shareholders of the national oil company.

However, SOEs also face some distinct governance challenges. One is that SOEs may suffer just as much from undue hands-on and politically motivated ownership interference as from totally passive or distant ownership by the state.

  • “In the past, managers of SOEs were sometimes selected according to political interests, and there was no transparency,” says Musacchio. “You see a more careful selection now, sometimes even based on merit.”

In order to minimise these challenges, state should :

a. The legal and regulatory framework for state-owned enterprises should ensures a level-playing field in markets where state-owned enterprises and private sector companies compete in order to avoid market distortion.

b.The state should act as an informed and active owner and establish a clear and consistent ownership policy, ensuring that the governance of state-owned enterprises is carried out in a transparent and accountable manner, with the necessary degree of professionalism and effectiveness.

c. The state and state-owned enterprises should recognise the rights of all stakeholders and ensure their equitable treatment and equal access to corporate information.

d. The state ownership policy should fully recognise the state-owned enterprises’ responsibilities towards stakeholders and request that they report on their relations with stakeholders.

e. The boards of state-owned enterprises should have the necessary authority, competencies and objectivity to carry out their function of strategic guidance and monitories of management. They should act with integrity and be held accountable for their actions. [15]



[1] “OECD Guidelines on Corporate Governance of State-Owned Enterprises,” OECD Publishing, 2005, available at (http://www.oecd.org/corporate/ca/corporategovernanceofstate-ownedenterprises/34803211.pdf)

[2] Musacchio and Sergio G. Lazzarini, “Leviathan in Business: Varieties of State Capitalism and Their Implications for Economic Performance” working paper at Insper Institute of Education and Research in São Paulo, Brazil, available at (hbswk.hbs.edu/item/7020.html)

[3] “What Capitalists Should Know about State-Owned Enterprises,” Forbes, published on Feb 22, 2013, available at ( http://www.forbes.com/sites/hbsworkingknowledge/2013/02/22/what-capitalists-should-know-about-state-owned-enterprises/)

[4] “What Capitalists Should Know about State-Owned Enterprises,” Forbes, published on Feb 22, 2013, available at ( http://www.forbes.com/sites/hbsworkingknowledge/2013/02/22/what-capitalists-should-know-about-state-owned-enterprises/)

[5]  “State-Owned Enterprises: Fixing China Inc,” The Economist, Published on Aug 30, 2014, Shanghai, available at (http://www.economist.com/news/china/21614240-reform-state-companies-back-agenda-fixing-china-inc)

[6] Xinhua News, available at (http://news.xinhuanet.com/english/indepth/2012-10/24/c_131928023.htm)

[7] ”Decoding China Inc,” China Economic Review, available at (http://www.chinaeconomicreview.com/decoding-china-inc)

[8] Xinhua News, available at (news.xinhuanet.com/english/china/2013-05/24/c_132406542.htm)

[9]  “30 Chinese SOEs to Follow Tenmasek Model by 2020,” WANT CHINA TIMES, May 30, 2014

[10] The Visible Hand: Special Report: State Capitalism, The Economist (Jan 21, 2012)

[11] Luh luh Lanh and Umakanth, “Shareholder Empowerment in Controlled Companies: The Case of Singapore, in Randall Thomas and Jennifer Hill (EDS.),” Research Handbook on Shareholder Power (forthcoming, 2015)

[12] Toh Han Li, “State-Owned Enterprises: The Singapore Experience,” 17th International Conference on Competition, Berlin, March 2005, Competition Commission of Singapore

[13] Wonhee Lee, “Case Study: Transparency of State-Owned Enterprises in South Korea,” Development of SOEs in Korea, International Budget Partnership, May 2014

[14] Yoichi Takahashi, “Corporate Governance of State-Owned Enterprises in China:Does Discipline by SOE Bond Work?,” Japan’s Experience with Zaito Reform, OECD, Development Research Centre of the State Council of the PRC, Beijing, Jan 2000

[15] “OECD Guidelines on Corporate Governance of State-Owned Enterprises,” OECD Publishing, 2005, available at (http://www.oecd.org/corporate/ca/corporategovernanceofstate-ownedenterprises/34803211.pdf)


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This entry was posted on June 27, 2015 by in Learning, News, World and tagged , , , .
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