# Understanding State-Owned Enterprises (SOE): How They Operate

![State-Owned Enterprise: An entity formed by the government for the purpose of engaging in commercial activities.](https://www.investopedia.com/thmb/9roGjPi_-MAVFLp-hYVG59Vp3GA=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/soe.asp-final-ef46513d33fe44199e68ecbb3621d64e.png)

*— Investopedia / Julie Bang*

## What Is a State-Owned Enterprise?

A state-owned enterprise (SOE) is a legal entity created by a government to engage in commercial activities. These entities can be either wholly or partially government-owned and are aimed at participating in specific commercial activities. In the United States, [Freddie Mac](https://www.investopedia.com/terms/f/freddiemac.asp) and [Fannie Mae](https://www.investopedia.com/mortgage/fannie-mae-loans/) are key SOEs. Globally, these organizations, found in countries like China, South Africa, and New Zealand, are central to national economies.

### Key Takeaways

*   State-owned enterprises (SOEs) are legal entities created by governments to engage in commercial activities, often with full or partial government ownership.
*   SOEs can be found worldwide and may exist in various sectors including finance, utilities, and public transportation.
*   Despite operating as for-profit entities, some SOEs do not generate profits and may require government support to continue operations.
*   Examples of SOEs include the U.S. mortgage firms Freddie Mac and Fannie Mae, and the South African power utility Eskom.
*   The value of SOE assets globally was estimated at $45 trillion as of 2020, according to the International Monetary Fund.

## How State-Owned Enterprises (SOEs) Operate and Legal Aspects

Known as government-owned corporations (GOC), state-owned entities differ from [listed](https://www.investopedia.com/terms/l/listedsecurity.asp) companies whose [stocks](https://www.investopedia.com/terms/s/stock.asp) are partly owned by a government; those are public companies with a government as a shareholder.

State-owned enterprises (SOEs) operate globally, including in countries like the United States, China, South Africa, [Norway](https://www.investopedia.com/terms/n/nok.asp), and New Zealand. Legally, most SOEs are considered business entities and have the associated rights and responsibilities. This means that they are normally required to follow any laws and regulations governing the operation of their business type, and they can also be held liable for their actions.

### $45 trillion

The current value of state-owned enterprises' assets worldwide, as of 2020, according to the [International Monetary Fund (IMF)](https://blogs.imf.org/2020/05/07/state-owned-enterprises-in-the-time-of-covid-19/). The figure reflects a huge jump in size for SOEs over the last few years, with emerging markets leading the charge.

## Examples of State-Owned Enterprises Across the World

Within the United States, mortgage companies Freddie Mac and Fannie Mae are some of the most recognized SOEs by its citizens, but SOEs are not limited to lending. In China, several companies have state backing, such as the Jin Jiang Hotel, which is owned and controlled by the government of Shanghai. The South Africa-based power utility Eskom is the 11th-largest company in the world in terms of electric-generating capacity, and it is an SOE of the South African government. Many public transportation systems and utilities are SOEs, as are postal services and some mining operations.

## The Process and Impact of Corporatization on SOEs

At times, an SOE is created out of a government agency through a process called [corporatization](https://www.investopedia.com/terms/c/coporatization.asp). This allows the agency to convert itself into a for-profit business. Often, the newly formed SOE still operates with government goals in mind, but officially it operates as a commercial enterprise. Sometimes, governments of [developing countries](https://www.investopedia.com/terms/l/ldc.asp) will create a state-run business in a sector that it wishes to develop or exploit to boost their economic standing on the global stage, such as the oil industry in Brazil, or the telecom industry in Argentina.

## Profitability Challenges and Financial Support for SOEs

Even though an SOE is a for-profit business entity, there are some that do not produce a profit. For example, the U.S. postal system may be operating at a loss for long periods of time. While some SOEs may be permitted to fail, those of importance to the operation of the state may receive government funding to continue its operations — particularly those deemed as critical to a country's infrastructure. In these cases, the SOEs actually cost the government money instead of generating revenue. In China, some accuse the government of supporting "[zombie](https://www.investopedia.com/terms/z/zombies.asp)" companies that would otherwise fail.

## The Bottom Line

State-owned enterprises (SOEs) play a critical role in the global economy, spanning industries from utilities to transportation and beyond. As government-created entities, they operate by engaging in commercial activities with either full or partial governmental ownership. While SOEs may aim for profit, some, such as critical public services, may operate at a loss but continue to receive governmental support. This dual nature of commercial aim and public service highlights their unique position in national economies.

Investors and policymakers should understand the balance SOEs maintain between commercial operations and public service goals, as they can significantly impact economic development and governmental fiscal strategies.