# **INTRODUCTION**

Despite decades of privatization and reforms to rationalize the role of the state in the economy, the state remains as a large and significant market player in the global economy. Firms with 10% or more state participation account for a significant share of the economic activity worldwide with an average of up to 17% of the GDP in developing economies (World Bank, 2023). State-owned enterprises mobilize 20% of the global investment and drive 11% of the global FDI inflows (WBGIEG, 2018).

Although state ownership in markets is not new, evidence suggests that economic shocks such as the financial crisis of 2007-2008 and more recently the COVID-19 pandemic can trigger the rise of state ownership and reorientation of state property policies (Szanyi, 2016) (OECD, 2020). This paper explores whether state ownership matters for firm operational and financial performance and to what degree the level of private participation (e.g., minority vs. full state ownership), the type of sector of operation (e.g., competitive activities vis-à-vis natural monopolies), and proximity to the government (e.g., direct vs. indirect shareholding) can explain potential performance gaps, aiming to shed light on policy implications for future reforms.

For this purpose, this paper compares the performance between privately-owned enterprises (POEs) and the Businesses of the State (BOSs) on two main dimensions. First, it measures operational performance through labor productivity. Second, it evaluates financial performance through indicators of profitability, liquidity, and return on investments. Businesses of State (BOS) are defined as legally separated entities, engaged in market production in which either national or subnational governments hold 10% or more participation through direct and indirect ownership (Dall'Olio, et al., 2022). By using this broader definition, we are able to capture a wider set of entities in which the state can have a certain degree of influence and go beyond the conventional State-Owned Enterprises (SOEs) approach, which is often associated to majority and directly owned firms. This allows us to explore how state ownership matters for operational and financial performance even through minority and indirect participation.

While state ownership has been widely studied to understand its effects on firm performance, surprisingly most studies follow either a country-specific or a sectoral approach and focus on directly and majority-owned firms. Nonetheless, these studies tend to overlook the ability of the state to influence firms’ performance through other channels including indirect shareholding and minority participation (World Bank, 2023). Moreover, not all markets in which the state operates are the same. The state can serve competitive sectors that are viable for private provision and exhibit low entry barriers such as the manufacturing of food or textiles, in partially contestable sectors featured by market failures (e.g., externalities) such as air transportation, or natural monopolies such as energy transmission. Yet, there is a significant gap in the literature regarding the role of state ownership in competitive sectors and how heterogeneous the effect is when operating in areas that are often served by the private sector.<sup>2</sup>

> 2 Although the state has different channels to intervene in the markets beyond shareholding, including regulation and support packages, this paper studies only the ownership channel in line with the analytical approach of Le (2021).

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