|Direct vs.|_Directly_|Firms where national or municipal governments hold 10|
|---|---|---|
|indirect|_owned_|percent or more stakes and report_directly_to a government|
|supervision|_SOEs_|agency or ministry, be it central or local.|
||_Indirectly_<br>_owned_<br>_SOEs_|Firms that are subsidiaries of other companies where national<br>or municipal governments hold 10 percent or more stakes.|

Source: World Bank staff analytical categorization based on the World Bank Global Businesses of the State (BOS) database, 2019. See World Bank (2022) for details.

## 3.3 Sector Taxonomy

**The paper also relies on a sector taxonomy that classifies industries based on the economic rationale that justifies an SOE presence** . The taxonomy was developed by Dall'Olio et al. (2022b) in conjunction with the BOS database. It classifies 4-digit NACE industries into three broad sectors (competitive, partially contestable, and natural monopoly) based on the economic rationale—the intrinsic features and associated market failures—that justifies SOE presence in an industry (see Table 2). Other NACE codes are excluded from the sector classification of SOEs because firms in those industries provide public goods (e.g., public administration and defense and activities of extraterritorial organizations). In contrast, others are characterized by externalities (e.g., education and human health activities). In these excluded sectors, government interventions are justified because entities in these services are either incapable of generating profits or not set up for market production. Of the 615 4-digit NACE industries, 511 are classified as competitive sectors, 41 as partially contestable sectors, 11 as natural monopoly sectors, and 52 industries are excluded (see Annex Table B1 for the list of partially contestable and natural monopoly sectors).<sup>7</sup>

Table 2: Sector Taxonomy Based on Economic Rationale Justifying SOE Presence

|**Sector taxonomy**|**Definitions**|
|---|---|
|Competitive Sectors|Industries that feature little to no entry barriers and are commercially viable for<br>multiple firms to operate (e.g., manufacturing of food and beverages, and taxi<br>operation). See Annex Table B1 for the list of competitive sectors.|
|Partially contestable sectors|Industries characterized by some form of market failure such as market power<br>resulting from structural barriers (i.e., barriers that relate to industry conditions,<br>such as economies of scale, network economies, fixed costs, and networks), and<br>oligopolistic structures (e.g., aviation, radio broadcasting, and banking). See<br>Annex Table B1 for the list of partially contestable sectors.|
|Natural monopoly sectors|Industries which feature high entry barriers, scale economies, or sub-additivity<br>cost structures (i.e., when a single firm can produce a product at lower cost than<br>the combined cost of two or more firms producing identical products), thus<br>making them more efficient for just one producer to operate (e.g., water utilities,<br>energy transmission, and postal activities with universal obligation). See Annex<br>TableB1 forthelist of natural monopoly sectors.|

Source: The taxonomy was developed by Dall'Olio et al. (2022b) to supplement the World Bank BOS database.

# 4. Empirical Methodology

**This section presents the empirical methodologies behind the main results** . It presents the econometric approaches used to (a) assess the differential performances between the varied ownership and control levels of SOEs and POEs during the 2011-2019 period, (b) examine whether SOEs acted as buffers during the

> 7 The competitive and excluded sectors are not listed in this paper due to the large number of sectors but for the full list see Dall'Olio et al. (2022b).

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