Does ownership matter? Comparing the performance of public and private enterprises in Ghana

Journal of Developing Areas

Volumn 33, Issue 1, 1998, Pages 53-72

  Bavon, Al ^a  

^a UNIVERSITY OF NORTH TEXAS   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

COMPARATIVE STUDY; INDUSTRIAL PERFORMANCE; PERFORMANCE ASSESSMENT; PRIVATE SECTOR;

GHANA;

EID: 0345493741     PISSN: 0022037X     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (125)

1. Daniel Swanson and T. Wolde-Semait, Africa's Public Enterprise Sector and Evidence of Reforms, World Bank Technical Paper No. 95 (Washington, DC: World Bank, 1989).
2. Government subvention to public enterprises (PEs) ceased with the introduction of the performance measurement and evaluation system into some segments of the PE sector in 1989.
3. William Adda, "Management and Reform of SOEs: The Ghana Experience" (paper presented at the Management Day of the School of Administration, University of Ghana, Legon-Accra, Ghana, 11 June 1990).
4. Tony Killick, Development Economics in Action: A Study of Economic Policies in Ghana (New York: St. Martin's, 1978).
5. William Adda, "Privatization in Ghana," in Privatization in Developing Countries, ed. Venkata Vemuri Ramanadham (New York: Routledge, 1989).
6. Paul Cook and Colin Kirkpatrick, eds., Privatization in Developing Countries (New York: St. Martin's, 1988).
7. Ahmed Galal, Public Enterprise Reform: Lessons from the Past and Issues for the Future, World Bank Discussion Paper No. 119 (Washington, DC: World Bank, 1991), p. 34.
8. John Nellis and Sunita Kikeri, "Public Enterprise Reform: Privatization and the World Bank," World Development 17 (May 1989): 659-72.
9. Alan Miller, "Privatization: Lessons from the British Experience," Long Range Planning 27(December 1994): 125-36.
10. Ronald Coase, "The Nature of the Firm," Economica 4 (November 1937): 386-405;
11. Erik Furubotn and Svetozav Pejovich, "Property Rights and Economic Theory: A Survey of Recent Literature," Journal of Economic Literature 10 (December 1972): 1137-62;
12. and Jacek Tittenbrun, Private versus Public Enterprise: In Search of the Economic Rationale for Privatization (London: Janus, 1996).
13. James Buchanan, The Economics of Politics (London: Institute of Economic Affairs, 1978);
14. Anthony Downs, Inside Bureaucracy (Boston, MA: Little Brown, 1967);
15. William Niskanen, Bureaucracy and Representative Government (Chicago, IL: Aldine-Atherton, 1971);
16. and Gordon Tullock, The Politics of Bureaucracy (Washington, DC: Institute of Economic Affairs, 1965).
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19. Robert Tollison, "Rent Seeking: A Survey," Kyklos 35 (1982): 575-602.
20. An exhaustive review of the empirical literature is beyond the scope of this paper. More extensive review of the current literature can be found in the works of Stephen Martin and David Parker, The Impact of Privatization: Ownership and Corporate Performance in the UK (New York: Routledge, 1997);
21. Thomas E. Borcherding, Werner W. Pommerehne, and Friedrick Schneider, "Comparing the Efficiency of Private and Public Production: A Survey of the Evidence from Five Federal States," Zeitschrift für Nationalökonomie/Journal of Economic Theory: Public Production, Supplement 2 (1982): 127-56;
22. Robert Millward and David Parker, "Public and Private Enterprises: Comparative Behavior and Relative Efficiency," in Public Sector Economics, ed. Robert Millward, David Parker, Leslie Rosenthal, Michael Sumner, and Neville Topham (London: Longman, 1983);
23. John Vickers and George Yarrow, Privatization: An Economic Analysis (Cambridge, MA: MIT Press, 1988);
24. and Tittenbrun, Private versus Public Enterprise.
25. See for instance the works of Borcherding, Pommerehne, and Schneider, "Comparing the Efficiency of Private and Public Production";
26. and Louis De Alessi, "The Economics of Property Rights: A Review of the Evidence," in Research in Law and Economics, vol. 2, ed. Richard Zerbe (Greenwich, CT: JAI, 1980), pp. 1-47.
27. Borcherding, Pommerehne, and Schneider, "Comparing the Efficiency of Private and Public Production," p. 134.
28. Anthony Boardman and Aidan Vining, "Ownership and Performance in Competitive Environments: A Comparison of the Performance of Private, Mixed, and State-Owned Enterprises," Journal of Law and Economics 32 (April 1989): 1-33.
29. Aidan Vining and Anthony Boardman, "Ownership versus Competition: Efficiency in Public Enterprise," Public Choice 73 (March 1992): 205-39.
30. A. Picot and T. Kaulman, "Comparative Performance of Government-Owned and Privately-Owned Industrial Corporations - Empirical Results from Six Countries," Journal of Industrial and Theoretical Economics 44 (1989): 131-64.
31. Ahmed Galal, Leroy Jones, Pankaj Tandon, and Ingo Vogelsang, Welfare Consequences of Selling Public Enterprises (Washington, DC: World Bank, 1992).
32. William Megginson, Robert Nash, and Matthias Van Randenborgh, "The Financial and Operating Performance of Newly Privatized Firms: An International Empirical Analysis," Journal of Finance 49 (June 1994): 403-52.
33. Colin Boyd, "The Comparative Efficiency of State-Owned Enterprises," in Multinational Corporations and State-Owned Enterprises: A New Challenge in International Business, vol. 1 of Research in International Business and International Relations, ed. Anant Negandhi, Howard Thomas, and K. L. K. Rao (Greenwich, CT: JAI, 1986);
34. Robert Millward, "The Comparative Performance of Public and Private Ownership," in The Mixed Economy, ed. Eric Roll (London: Macmillan, 1982);
35. Millward and Parker, "Public and Private Enterprises."
36. Raymond Duch, Privatizing the Economy: Telecommunications Policy in Comparative Perspective (Ann Arbor: University of Michigan Press, 1991).
37. Michael Pollilt, Ownership and Performance in Electric Utilities: The International Evidence on Privatization and Efficiency (Oxford: Oxford University Press, 1995).
38. A review of several studies of firm performance using developing country examples can be found in the following works: Ramesh Adhikari and Colin Kirkpatrick, "Surveys of Practice and Principles" in Public Enterprise at the Crossroads, ed. John Heath (London, UK: Routledge, 1990);
39. Peter Enderwick, "Multinational Enterprises and Privatization of State-Owned Enterprises," International Business Review 3 (1994): 135-47;
40. and Osama Abu Shair, Privatization and Development (New York: St. Martin's, 1997).
41. Richard Funkhouser and Paul MacAvoy "A Sample of Observations on Comparative Prices in Public and Private Enterprise," Journal of Public Economics 11 (June 1979): 353-68.
42. Kwan Kim, "Enterprise Performances in the Public and Private Sectors: Tanzanian Experience, 1970-75," Journal of Developing Areas 15 (April 1981): 471-84.
43. Rolf Luders, "The Success and Failure of State-Owned Enterprise Divestitures in a Developing Country: The Case of Chile," Columbia Journal of World Business 28 (Spring 1993): 98-121.
44. Barbara Grosh, "Public, Quasi-Public, and Private Manufacturing Firms in Kenya: The Surprising Case of a Cliché Gone Astray," Development Policy Review 8 (1990): 43-58.
45. Rugayah Mohammed, "Performance of Public and Private Enterprises in Malaysia: An Empirical Analysis," Singapore Economic Review 37 (1992): 35-47.
46. Erol Cakmak and Osman Zaim, "Privatization and Comparative Efficiency of Public and Private Enterprises in Turkey: The Cement Industry," Annals of Public and Cooperative Economics 63 (1992): 271-84.
47. Robert Millward, "Measuring Sources of Inefficiency in the Performance of Private and Public Enterprises in LDCs," in Privatization in Less Developed Countries, ed. Paul Cook and Colin Kirkpatrick (Brighton, UK: Wheatsheaf, 1988).
48. Tittenbrun, Private versus Public Enterprise.
49. Noel Capon, John Farley, and Scott Hoenig, "Determinants of Financial Performance: A Meta-Analysis," Management Science 3 (October 1990): 1143-59;
50. Ellen Jackofsky and John Slocum Jr., "CEO Roles across Cultures," in The Executive Effect: Concepts and Methods for Studying Top Managers, ed. Donald Hambrick (Greenwich, CT: JAI Press, 1988);
51. Pradip N. Khandwalla, "Performance Determinants of Public Enterprises: Significance and Implications for Multinationalization," in Research in International Business and International Relations, ed. Anant Negandhi (Greenwich, CT: JAI Press, 1986);
52. R. T. Lenz, "Determinants of Organizational Performance: An Interdisciplinary Review," Strategic Management Journal 2 (April-June 1981): 131-54;
53. Roderick White and Richard Hamermesh, "Toward a Model of Business Unit Performance: An Integrative Approach," Academy of Management Review 6 (April 1981): 213-23.
54. Khandwalla, "Performance Determinants of Public Enterprises," p. 197.
55. Charles Hoffer and Dan Schendel, Strategy Formulation: Analytical Concepts (St. Paul, MN: West, 1978);
56. Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York: Free Press, 1985);
57. Hans Thorelli ed., Strategy + Structure = Performance: The Strategic Planning Imperative (Bloomington: Indiana University Press, 1977).
58. Richard Cyert and James March, A Behavioral Theory of the Firm (Englewood Cliffs, NJ: Prentice Hall, 1963);
59. Donald LeCraw, "Bargaining Power, Ownership, and Profitability of Subsidiaries of Transnational Corporations in Developing Countries," Journal of International Business Studies 15 (Spring/Summer 1984): 27-44;
60. Markham Collins, "A Market Performance Comparison of US Firms Active in Domestic, Developed, and Developing Countries," Journal of International Business Studies 21 (Second Quarter 1990): 271-88;
61. and LeCraw, "Bargaining Power, Ownership, and Profitability of Subsidiaries."
62. Shair, Privatization and Development, p. 77.
63. While the literature is replete with a number of indicators measuring the different exogenous factors likely to affect firm performance, in deciding what variables and indicators to select for this study, I was guided by the literature as well as by considerations of the availability of complete and reliable data.
64. Saul Estrin and Virginie Perotin, "Does Ownership Always Matter?" International Journal of Industrial Organization 9 (1991): 55-72.
65. Data on the number of shares held by the government in any enterprise in Ghana as of 1993 were obtained from State Enterprises Commission (hereafter SEC), The Divestiture Program: Review of Progress (1988-93) and Recommendations for 1994 (Accra, Ghana: SEC, 1994).
66. See especially tables 1, 2, and 3 on pages 11-18. Data for other years were derived from the 1994-96 issues of the annual reports of the Ghana Stock Exchange (hereafter GSE). See GSE, Ghana Stock Exchange Fact Book (Accra, Ghana: GSE, 1996);
67. idem, Ghana Stock Exchange Handbook (Accra, Ghana: GSE, 1995);
68. and idem, Ghana Stock Exchange Handbook (Accra, Ghana: GSE, 1994).
69. Strong arguments for this position can be found in articles by Douglas Caves and Laurits Christensen, "The Relative Efficiency of Public and Private Firms in a Competitive Environment: The Case of Canadian Railroads," Journal of Political Economy 88 (October 1980): 958-76;
70. Simon Domberger and John Piggott, "Privatization Policies and Public Enterprises: A Survey," Economic Record 62 (June 1986): 145-62;
71. J. A. Kay and D. J. Thompson, "Privatization: A Policy in Search of Rationale," Economic Journal 96 (March 1986): 18-32;
72. and Millward and Parker, "Public and Private Enterprises."
73. Andrew Dunsire, Keith Hartley, and David Parker, "Organizational Status and Performance: Summary of the Findings," Public Administration 69 (Spring 1991): 21-40.
74. Domberger and Piggott, "Privatization Policies and Public Enterprises," p. 150.
75. The effect of competition on a firm's performance is more accurately reflected in the type of indicator used to measure performance. It has been stated that more competition probably reduces profitability but increases efficiency and productivity growth. See Stephen Nickell, "Competition and Corporate Performance," Journal of Political Economy 104 (August 1996): 724-46.
76. Competition in the product market simply means competition from at least one other firm producing or marketing a similar product in the local domestic market. With few exceptions, the firms in this study are very active in the domestic market but have relatively little influence in the West African or African subregional market, let alone the international market. The Ghana Cocoa Board, which has a significant influence in the world cocoa market, is the major exception. Also, the Volta River Authority markets hydroelectric power to countries such as Togo, Benin, and Burkina Faso, all in the West African subregion.
77. A preferable alternative to using a dichotomous measure of competition would be to use the market share held by each firm in the domestic market. In the absence of market share data, however, I used my knowledge of the Ghanaian market to create a dichotomous variable to measure competition. In this example, all the private firms and some of the PEs in the transportation, newspaper publishing, housing, and bottling industries, for instance, took on a value of 1 because there were other producers or suppliers of the same or similar products in the Ghanaian market. On the other hand, some PEs such as the Volta River Authority, Electricity Corporation, Ghana Water and Sewerage Corporation, Tema Oil Refinery, and Ghana Cocoa Board retain exclusive monopoly powers over their market share in the domestic market, and therefore take on a value of O. Measuring competition on a binary level has been used in other studies. See Spyros Lioukas and Demetrios Papoulias, "The Effectiveness of Public Enterprises in Greece," Public Enterprise at the Crossroads: Essays in Honour of V. V. Ramanadharn, ed. John Heath (London: Routledge, 1990);
78. and Nickell, "Competition and Corporate Performance."
79. Miriam Dornstein, Boards of Directors under Public Ownership - a Comparative Perspective (New York: Walter de Gruyter, 1988).
80. Kay and Thompson, "Privatization: A Policy in Search of Rationale."
81. A government report defined "core" PEs as "SOEs [state-owned enterprises] [that] are of strategic importance and are considered as priority enterprises. They may or may not be profitable but are essential due to political, security, social, or developmental reasons or their impact on the budget" (SEC, Comments and Clarifications: World Bank's Report on Ghana Public Enterprise Reform [Accra, Ghana: SEC, 1992], p. 15).
82. See also SEC, Divestiture Program, p. 20, for categorization of different types of PEs.
83. Pollitt, Ownership and Performance in Electric Utilities.
84. David Evans, "The Relationship between Firm Growth, Size, and Age: Estimates for 100 Manufacturing Industries," Journal of Industrial Economics 35 (June 1987): 567-81;
85. Bronwyn Hall, "The Relationship between Firm Size and Firm Growth in the US Manufacturing Sector," Journal of Industrial Economics 35 (June 1987): 583-606;
86. and M. S. Kumar, "Growth, Acquisition Activity, and Firm Size: Evidence from the United Kingdom" Journal of Industrial Economics 33 (March 1985): 327-38.
87. Peter Hart and Nicholas Oulton, "Growth and Size of Firms," Economic Journal 106 (September 1996): 1242-52.
88. Paul Geroski, Stephen Machin, and Christopher Walters, "Corporate Growth and Profitability "Journal of Industrial Economics 45 (June 1997): 171-89.
89. I used log of sales as the measure in this study instead of the raw sales figures, because a diagnostic test to formally evaluate the null hypothesis that the sample came from a normally distributed population revealed that sales data appeared significantly nonnormal in skewness. The literature suggests employing nonlinear transformations such as logarithms to change the shape of the distribution with the aim of making skewed distributions more symmetrical and therefore more nearly normal. See Lawrence Hamilton, Statistics with Stata 5 (Pacific Grove, CA: Doxbury, 1998), p. 101.
90. Evans, "Relationship between Firm Growth, Size, and Age."
91. Boyan Jovanovic, "Selection and Evolution of Industry," Econometrica 50 (May 1982): 649-70.
92. Gladstone Hutchinson, "Efficiency Gains through Privatization of U.K. Industries," in Privatization and Economic Efficiency: A Comparative Analysis of Developed and Developing Countries, ed. Attiat Ott and Keith Hartley (Brookfield, VT: Edward Elgar, 1991);
93. Parker and Hartley, "Status Change and Performance."
94. Vining and Boardman, "Ownership versus Competition";
95. Virginia Soybel and Clyde Stickney, "Comparing U.S. and Japanese Corporate-Level Operating Performance Using Financial Statement Data," Strategic Management Journal 15 (January 1994): 75-83;
96. Funkhouser and MacAvoy, "A Sample of Observations on Comparative Prices in Public and Private Enterprise";
97. and Megginson, Nash, and Van Randenborgh, "Financial and Operating Performance of Newly Privatized Firms."
98. The debate on this issue can be found in the following: Willem Buijnik and Marc Jegers, "Accounting Rates of Return: Comment," American Economic Review 79 (March 1989): 287-89;
99. Franklin Fisher, "On the Misuse of the Profit-Sales Ratio to Infer Monopoly Power," Rand Journal of Economics 18 (Autumn 1987): 384-96;
100. and Robert Jacobson, "The Validity of ROI as a Measure of Business Performance," American Economic Review 77 (June 1987): 470-78.
101. Erich Helfert, Techniques of Financial Analysis (Homewood, IL: Irwin, 1987), p. 35.
102. Even though return on assets (ROA) is a profitability ratio, it has also been identified as a measure of managerial efficiency in some publications. See for instance Boardman and Vining, "Ownership and Performance in Competitive Environments";
103. Lioukas and Papoulias, "Effectiveness of Public Enterprises in Greece," p. 177;
104. and El-Khider Ali Musa, "Privatization of Public Enterprises in the Less Developed Countries," International Privatisation: Strategies and Practices, ed. Thomas Clarke (New York: Walter de Gruyter, 1994), p. 364.
105. See, for example, Stephen Machin and John Van Reenen, "Profit Margin and the Business Cycle: Evidence from UK Manufacturing Firms," Journal of Industrial Economics 41 (March 1993): 29-51;
106. Sam Okoroafo, "Firm Performance in a Liberalized Environment: Empirical Evidence from a Developing Country," Journal of Business Research 28 (November 1993): 175-89.
107. Helfert, Techniques of Financial Analysis, p. 27.
108. The firms in this study were selected based solely on one criterion - availability of data. There are over 200 public enterprises in Ghana but the 14 selected for this study have data covering the study period, 1986 through 1995, that is complete with some reasonable degree of reliability. Also, there are hundreds more private companies; however, the 18 selected for the study are the ones on the GSE with complete data covering the time period.
109. The cedi is the local currency in Ghana. The current exchange rate of the local currency as of July 1998 is approximately 2,300 cedis to one US dollar. See West Africa, West Africa Magazine, 6-26 July 1998, p. 587.
110. International Monetary Fund (IMF), International Financial Statistics (Washington, DC: IMF, 1997).
111. Lois Sayrs, Pooled Time Series Analysis, Sage University Series Papers on Quantitative Applications in the Social Sciences, no. 70 (Beverly Hills, CA: Sage, 1989);
112. and James Stimson, "Regression in Space and Time: A Statistical Essay," American Journal of Political Science 29 (November 1985): 914-47.
113. Sayrs, Pooled Time Series Analysis.
114. Hamilton, Statistics with Stata 5.
115. Nathaniel Beck and Jonathan N. Katz, "What to Do (and Not to Do) with Time-series Cross-sectional Data," American Political Science Review 89 (September 1995): 634-47;
116. Nathaniel Beck, Jonathan Katz, R. Michael Alvarez, Geoffrey Garrett, and Peter Lange, "Government Partisanship, Labor Organization, and Microeconomic Performance: A Corrigendum," American Political Science Review 87 (December 1993): 945-48.
117. Halbert White, "A Heteroskedasticity Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica 48 (May 1980): 817-38.
118. Capon, Farley, and Hoenig, "Determinants of Financial Performance."
119. Evans, "Relationship between Firm Growth, Size, and Age";
120. Hall, "Relationship between Firm Size and Firm Growth in the US Manufacturing Sector";
121. and Kumar, "Growth, Acquisition Activity, and Firm Size."
122. West Africa, "Ghana's Divestiture," West Africa, 27 June 1988, pp. 1152-53.
123. Government of Ghana, Ministry of Finance and Economic Planning, Program of Action to Mitigate the Social Cost of Adjustment (Accra, Ghana: Ministry of Finance and Economic Planning, 1987).
124. Capon, Farley, and Hoenig, "Determinants of Financial Performance."
125. Galal, Public Enterprise Reform.