What are the pros and cons of having so many state-owned companies?

Question

What are the pros and cons of having so many state-owned companies?

https://en.wikipedia.org/wiki/List_of_government-owned_companies

State-owned enterprises accounted for over 60% of China's market capitalization in 2019[4] and generated 40% of China's GDP of US$15.97 trillion (101.36 trillion yuan) in 2020, with domestic and foreign private businesses and investment accounting for the remaining 60%.[5][6] As of the end of 2019, China's SOEs represented 4.5% of the global economy[7] and the total assets of all China's SOEs, including those operating in the financial sector, reached US$78.08 trillion.[8] Ninety-one (91) of these SOEs belong to the 2020 Fortune Global 500 companies.[9]

China has a lot of state-owned companies, but if owning so many state-owned companies only had benefits for the nation having them, then how come other countries don't emulate China? That's why I am wondering what the pros and cons are for any nation for having a lot of state-owned companies.

I can't think of any con, and I think of two pros, unlimited budget and financing from the government and higher income from other sources than taxation.

Answer 1

Not sure this is entirely balanced, but here are some pros and cons. Many of my cases come from France, where I used to live and which has long had a Colbert-inspired love affair with state ownership.

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This answer is strictly concerned with companies operation in for profit sectors as the OP asked for economic factors such as income and financing. Companies that are run for social purposes or operating in sectors where the market is not necessarily ideal, like health care or education aren't covered. Other answers do that. It also doesn't really concern itself where cases where the state provided initial assistance or subsidies but without ownership and over a short period (arguably, SpaceX).

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Innovation (or the lack thereof)

When I lived in France, we had a SOE, Honeywell Bull, who manufactured mainframes. They were the suckiest mainframes, far suckier than the not-great IBM mainframes. But being a state company they were a big fish.

An underperforming private company usually ends up bankrupt. An SOE can remain a zombie.

Sources of revenue (hah!)

Again taking Bull, far from being an extra source of revenue, they gobbled up taxpayer bailouts every so often. Tellingly, while the EU never did put in rules limiting how much governments could finance themselves from their SOE, they did put in fairly strict limits on much they could subsidize their SOEs. Rules that the more SOE-happy countries were always trying to get around.

Or the famous Credit Lyonnais case of the 90s in France.

Crédit Lyonnais is a historic French bank. In the early 1990s it was the largest French bank, majority state-owned at that point. Crédit Lyonnais was the subject of poor management during that period which almost led to its bankruptcy in 1993. It was acquired by former rival Crédit Agricole in 2003.

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(look at r13's comment, and do the math)

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Keep-the-jobs pressure.

Face it, no one likes to see mass layoffs, even if it is only to trim an underperforming division and hire in another. When a private company does it, depending on the country, they may get some governmental pushback, but it is a decision taken by an independent actor. When a state-owned company does it, there can be a political cost to its owner, the government. Which might decide not to layoff.

When monopolists, can be expensive and bad for customers

Before some measure of competition got injected, France Telecom was often criticized for delivering iffy phone services at high prices. At one point, their "certified" cassette answering machines were 4x US prices.

British Columbia, where I now live, has a Crown company that has a monopoly that provides car insurance for consumers. Guess what, it also has much higher prices than other provinces. Does it make lots of money for the government? It does not, it is that inefficient.

(see also Fizz's answer for an excellent point, no need for me to repeat it)

Special rules for special companies.

I'll take an example which isn't really an SOE, SNC-Lavalin in Canada. They got caught bribing abroad. Then they almost got a sweetheart deal because they were well-connected with the Canadian government. Big scandal on Trudeau's goverment. Those risks go up, way up, when the state owns the company, but they are tend to be more pervasive the more the state is involved in economic production.

(I'll to find a directly state-owned case of malfeasance forgiven, but it will be obvious to most that the state is unlikely to treat itself unkindly in most cases).

Governments are unlikely to "rock the boat".

Let's take Tesla. When it first sold the Roadster it took a very bizarre spin on EVs: making them sexy. Before Tesla, this just wasn't how EV cars were designed and marketed. EVs were meant to be parsimonious cars for ascetic, high-minded, environmentally-conscious folk: EVs also didn't really exist.

Once a government has stakes in many car manufacturers it will naturally try to limit their competition. This isn't necessarily a monopoly per se, but it will limit the funding and ease of bringing new business models to fruition when the government both regulates and benefits from economic activity in a given economic sector.

Speaking on a related subject, one could consider the taxpayer-funded bits of NASA's contractors on the SLS to be almost SOEs. 20B$ later that turkey hasn't flown and will cost $2B/launch. Probably a comparable sum of cashflow and investment later SpaceX almost has Starship costing maybe as low as 10M+ per launch (yes, yes, that is Musk-speak so that needs a grain of salt, but it's still likely to be ballpark-ish). SpaceX has taken over a huge chunk of the launch market already with the Falcons.

Sucking up financing.

unlimited budget and financing from the government

Well, yes. This means that better alternatives and innovative solutions may be starved of capital. Is that a "pro"???

Honorable mention:

Fannie Mae & Freddie Mac (quasi-SOEs) and the 2008 financial crash They're not strictly for-profit, having more of a social dimension, but hey, couldn't resist.

Some actual pros:

Under some conditions a new market may be difficult to enter or finance and a government can start a new industry from scratch. EDF, in France, did very well for decades building nuclear reactors and it's hard to see private sector companies lasting it out in that domain (Westinghouse is dead, for example).

As one commenter pointed out, high speed rail is something that the French SNCF has innovated and delivered (so did Japan Rail). Then again, USA's Amtrak shows that state ownership and rail is not an automatic win.

Some sectors are more naturally suited to nationally or regionally coordinated/unitary infrastructures / monopoly providers - roads, rail, utilities, airports... etc. The state may operate those better than private sector companies that are unsuitably regulated. Strangely enough France has a very good network of high speed highways, built and run by private operators. It also has some world-class private companies specialized in municipal water delivery, something where public ownership isn't always good. There is a whole concept of involving private actors in these types of projects, PPP, that doesn't always deliver when private companies are brought in.

In the US, there has been a push by some municipalities to put together their own municipal broadband services, citing bad service by the private sector. Of course, any protests by the much-beloved US telecoms companies, which has included getting state laws forbidding such initiatives passed, are purely in the interest of users.

Or an endeavor may take a long time to come to fruition, yield massive, but diffuse economic benefits and needs government nurturing. Companies/government departments during agricultural research into better crops are something to consider, ex: Embrapa in Brazil.

In a developing country with weaker financial and technological depth, a government can seize an opportunity and quickstart an industry the country has a special advantage in.

In a situation with national resources sometimes it is better to have a national company than leave it to the foreign multinationals. Saudi Arabia is probably better off with Aramco than by letting Shell and Exxon take over (as a comment states, maybe Statoil in Norway is a even better showcase, but that might give the impression that you need a super well-run host country to pull that off).

On the flip side, you have Venezuela's "management" of PDVSA (take the 25 year graph).

A state may also choose to subsidize its SOEs exports to undercut at a loss local providers in its export markets, something known as dumping. This is something that comes up every so often with regards to China, whether that is actually the case or is just a convenient complaint by those local providers. This might be especially true in the case of "strategic industries" where a private sector actor would not have a benefit in behaving thus.

China has been playing that game with rare earth metals.

Success is not impossible...

(assuming there is not too much corruption)

But in many cases the more likely outcome will be that an SOE will underperform, economically. So even a state that is successfully deploying SOEs for specific purposes will likely need a larger stable of private enterprises to provide the tax base necessary.

Most of China's newfound dynamism, the companies we hear about, aren't from an SOE background. Alibaba TikTok

2022 Paper abstract re China SOE:

The nominal performance of SOEs is not high enough. Indeed, from 2001 to 2009, the average return on equity of SOEs was 8.16%, while that of non-state owned industrial enterprises was 12.9%. In 2009，the return on equity of SOEs was 8.18%, while it was 15.59% for non-stated owned industrial enterprises. Moreover, the recorded performance of SOEs is not a reflection of their real performance, but the result of numerous preferential policies and an unfair business environment.

p.s. if you feel that I have misrepresented poor SOEs and undersold their benefits that's a cue to write your own answer. I have tried to show cases where for-profit SOEs can be useful - that list got progressively longer and detailed - but consider that to be very much the exception.

Answer 2

In a dictatorship, being state-owned is a competitive advantage. Being a part of the government means that the authoritarian tools of the government don't work against you, they work for you. State-owned enterprises might have privileges civil enterprises do not. If they break any laws, then law enforcement will not do anything unless the regime allows them. The media won't dare to lose a bad word about them. And state policy will usually look out more for the benefits of state-owned enterprises than those of civil enterprises.

In a democracy, being state-owned is a competitive disadvantage. Public companies are expected to be less driven by capitalist interests and more driven by serving the public good. They are generally expected to be the "good guys" and respect employee rights, customer rights, environmental and social responsibilities beyond what the letter of the law requires. They are expected to follow all laws and regulations with all the t's crossed and all the i's dotted. Public transportation companies are expected to offer fair prices and serve remote areas even if it's not making them any money. Public electricity companies are expected to be very lenient with poor customers who can't afford to pay their bills. I personally work in a German public sector company, and by our by-laws we are not allowed to make excessive profits. We have to end up close to 0 each year.

But at the same time, publicly owned companies in a democracy are still expected to follow instructions from the government. We can see that in Germany where a couple month ago the federal government forced all publicly owned transportation companies (and those are a lot), to offer and accept a 9€/month nation-wide flatrate ticket for 3 month, no matter if they want to or not. Yes, the federal government still shouldered most of the costs from that initiative. But enforcing something like that on privately owned companies would have been legally and politically impossible in a democracy. It was only possible to do that because those transportation companies were all publicly owned. (Although it might have been possible to pull this off with privately owned companies in a dictatorship)

The result is that publicly owned companies in democratic countries usually end up far less competitive than privately owned companies and usually require large subsidies of taxpayer money to stay solvent. Which is a reason why fiscally conservative politicians often seek to privatize public sector tasks. The idea is that private companies are allowed to operate more efficiently than publicly owned companies due to not being bound to all the moral responsibilities and political restrictions that come with being in the public sector.

Answer 3

I think you are looking at this from the wrong viewpoint. You are stating that the company would have unlimited budge and financing from the government but that is not the case. A quick example of this would be the postal service in the US and all the issues about that being profitable or not. Just because a business is owned by the government doesn't mean that it doesn't have to concern itself with budgets and being profitable.

While it might be true that it might have an easier time securing funding there are still issues with how much it can secure. If a business is owned by the state and it is losing money it is not doing any good and can actually be doing harm.

Answer 4

Historical reasons
China is a former communist country, where everything used to be owned by the state. A few decades ago it has gone through massive privatization in order to raise its economy, remaining communist mainly in name. However, significant part of government ownership exists.

Natural monopolies
Natural monopolies are situations where free market competition might be more harmful than beneficial for the economy and the society. The examples include urban networks - like water supply, transportation networks, and, on the state level, army, nuclear energy, etc. Obviously, such monopolies are not exclusive to China. The existence of such monopolies (and other well-known situations of market failure) has been known for a long time and is covered in any basic economics textbook (contrary to the popular but naïve claims by pro-/anti-capitalists who have never read these books.)

Externalities
Externalities are economic situations where the free market is efficient, but its outcome may have negative consequences on the parties not directly involved in the market activity (that is the parties that do not act as sellers or buyers in the market). Using fossil fuels is one example: e.g., car producers are able to create cheap, efficient, and comfortable cars running on fossil fuels, and the customers are happy with them, but there is a negative side effect in the form of the contribution of these cars to the global warming. While it is not of direct concern to either sellers or buyers, it must be addressed, even if it harms the economic activity.

In other words, government interference may be beneficial or at least necessary to address market failures, and this is routinely done in most western countries (US included).

Answer 5

Large controlled state sector allows setting low prices for the most basic goods and services, making the labor cheap. This makes China attractive for foreign investors that moved there huge part of the industry from the developed Western countries. Even paper face masks were not possible to make in the countries that used to build Moon rockets.

Differently, electronic industry in Easter Europe mostly collapsed, even if the products in some cases looked competitive on the world market. They received also proposals from Western investors, but with heating, transport and food costing as much as it did, the required minimal salaries were not sufficient to sustain the existence of the workers.

Answer 6

Let me add one point here, that in some cases the opposite of "unlimited budget and financing from the government" happens to a SOE, namely that it gets treated as a piggy bank of sorts, at least in terms of underinvestments. According to a World Bank write-up

numerous surveys and studies show that the shortage of key infrastructure capacities, due in part to SOE inefficiencies and underinvestment, is ranked as one of the top three constraints on competitiveness and growth. One study shows that investment by many infrastructure SOEs is 50–120 percent lower (depending on the country group) than required to meet service delivery needs (Estache and Fay 2007).

I haven't read that study cited (yet), but I know from some anecdotal accounts from friends who grew up in Eastern Europe that it was e.g. almost impossible to get a phone line without paying a bribe (to the employees of the state-owned phone company) some decades ago. The reason: scarcity due to underinvestment, coupled with abnormally low formal prices. And if you don't want to take my word for that, it's still a major problem in some parts of the world "1.6 billion people annually have to pay a petty bribe to get public services" although surely mostly for stuff other than fixed phone lines, nowadays. (That paper exemplifies with bribes for healthcare.)

Although limited to a sample of the Shanghai stock market, one paper (by a Chinese academic) interestingly finds that "among state-owned enterprises [...] the level of under-investment is worse than the level of over-investment." Another paper on Serbian SOEs, explores some reasons for this, namely that the gov't may not want to guarantee the SOE loans, and--at the same time--their SOE status prohibits mortgaging their assets.

Answer 7

As some have mentioned above, one pro of a state-owned company that China might try to leverage is that they can focus on technologies and public objectives that private profit-driven companies might not invest as much in because said objectives may not be profitable (or at least not profitable in the immediate future). Thus, a state-owned company can be seen as especially useful for an infant industry that is currently not seen as worth it for private investors.

A con is that there will be a stronger political influence over the company by politicians than with a private enterprise. This influence can lead to situations where politicians who might not know much about the business's regular operations or the needs of the particular industry get to have the final say over major business decisions and the number of resources a state company gets.

Answer 8

This is a complex question that is also in a big part one of political view, not economics.

State ownership in economical terms is beneficial wherever you have a natural monopoly. This was the case for many, many companies in Europe until the 90s, especially utilities - there is not point in having two companies provide water in the same city. The water won't be different, the pipes won't be different, what they'd be competing on would be a) who can do the better marketing and b) who can run operations on the cheap without everything breaking down. Policy makers realized that b) is dangerous to the public, because you can save on maintenance, for example, for years or decades, run your competitor out of the market, and then raise prices to finally do that maintenance or just let things break down and get the government to bail you out because, you know, people need water.

The second thing where state-ownership is beneficial is public services, such as public transport. Even in large cities, these often run at a loss, but it is good for the city to have them.

Nevertheless, you want these entities to be run like a company, not like a government office, because they largely are - they are producing something and selling it to customers.

The political question is where you draw the line. Buses are public transport, but what about taxis? The water company is state-owned, but what about telephone? Internet? Television and radio?

Different countries draw the line in different places at different times (e.g. in Europe the privatization hype of the 90s saw many previously state-owned companies turned into private companies. Some of it worked out, some of it was a total disaster.)

Answer 9

Well, I recall during my childhood and teenage years that most of the big industries in the UK were nationalised.

I know the monarchy comes in for a lot of stick. But think about this - they presided over the dismantling of the Empire, or rather a conversion into a commonwealth of nations - and also the conversion of Britain into a socialist - by our neoliberal standards on steroids today - state.

However, there was a stronger feeling of everybody being in it together. I remember the miners strikes and how that was televised - daily. When unemploymemt surged that was on the news - daily. That sort of news does not make the news now. That's a dereliction of journalistic integrity as far as I see it. Instead, people are thrown away like trash or detritus. I think patriotism means getting a good deal for everyone - apart from billionaires who can't pay their taxes and billionaite corporations that also cannot pay their taxes.

Today, we have an economy much more modelled on the neoliberal USA. I think to Britains detriment. It all came in with Thatcher and Reagan. Her alma mater - Oxford University - refused to give her an honourary degree. And apparently the Queen had a rather frosty relationship with her too. One wonders why ...