Does autonomy matter in state owned enterprises? Evidence from performance contracts in India

Abstract

The empirical effect of enterprise autonomy on the performance of state-owned enterprises is surprisingly scant despite autonomy being a preferred reform instrument in many countries, and often chosen over privatization. Using longitudinal data on performance contracts for state-owned enterprises in India, this paper empirically examines whether granting increased autonomy to state-owned enterprises through such contracts positively impacts enterprise profitability. Further, using the unique reform experience of India as a natural experiment, whereby enterprise autonomy has been simultaneously pursued with partial privatization for a sub-set of enterprises, a unique contribution of the study lies in investigating whether ownership divestiture through partial privatization has any effect once enterprises are imparted managerial autonomy, or whether ownership per se matters. Classifying state owned enterprises into three types, namely those that have been granted autonomy, those with autonomy and partially divested ownership, and those with neither, the study finds robust evidence of a positive impact of managerial autonomy on enterprise profitability. Additionally, once autonomy is controlled for, the study finds at best a weak effect of partial privatization. These results raise doubt on earlier findings of a robust positive effect of partial privatization in India in studies that did not explicitly control for enterprise autonomy thereby raising the possibility that the positive privatization effect that showed up was in actuality, an autonomy effect.