Working Paper No. 08-04

Multinationals and the Shutdown of State-Owned Enterprises

Grzegorz Pac

October 2008

ABSTRACT

This paper examines the relationship between multinational enterprises (MNEs) and the shutdown of state-owned enterprises (SOEs) in transitional economies. First, a two-country model of oligopoly in partial equilibrium is developed to show how productivity of SOEs and international trade costs in‡uence the shutdown of SOEs after privatization. Under Cournot competition, the model predicts that if MNE’s acquisition of the SOE leads to higher productivity gains by the SOE, then local production is profitable for the MNE and the SOE is less likely to be shutdown. Furthermore, if SOE’s productivity is expected to rise only under MNE’s ownership, then a rival domestic private firm can acquire and shutdown the SOE; the domestic private firm may prevent MNE’s ownership of the SOE and thus reduce competition in the post-privatization market. Second, using firm-level privatization data from Central and Eastern Europe, it is found that MNEs’ ownership of former SOEs significantly reduces the probability of shutdown of former SOEs, whereas domestic private ownership increases the probability of shutdown. It is also found that pre- and post-privatization productivity levels do not significantly differ between SOEs acquired by MNEs versus domestic private firms. As productivity levels of SOEs rise after privatization, the probability of their shutdown decreases. These findings support theoretical predictions outlined in the paper.

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