Empirical Study on the Performance of State-owned-enterprises and the Privatizing Pressure: The Case of Korea

Over the last 30 years, the performance of state-owned-enterprises (SOEs) has been disappointing while the privatization of SOEs has been treated with doubts. Policy makers around the world were left with few SOE policy options at a time when their performance caused not only administrative headaches but also political nightmare. The situation in Korea is similar where a sizeable SOE sector has under-performed and the government has been hard pressed to find solutions to enhance their performances prior to the privatization program. In this paper, we examined whether the government imposition of hard budget constraint on SOEs has affected the operations of SOEs. We made a performance comparison of 22 Korean SOEs between periods when they were under the privatization pressure during 1998-2002 and a period under which they were subject to little privatization pressure. After conducting time-series and cross-sectional (TSCS) regression analysis with a dataset from 22 Korean SOEs, we found there existed a statistically significant positive relationship between the privatization pressure and the operating efficiency of SOEs. This implies that while finding ways to privatize SOEs, policymakers need to continually apply privatization pressures on SOE managers in order to impose hard budget constraints on SOEs