Institutions and Firms' Productivity: Evidence from Electricity Distribution in the EU
| Published date | 01 April 2016 |
| Author | Chiara Del Bo,Elisa Borghi,Massimo Florio |
| Date | 01 April 2016 |
| DOI | http://doi.org/10.1111/obes.12087 |
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©2014 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd.
OXFORD BULLETIN OF ECONOMICSAND STATISTICS, 78, 2 (2016) 0305–9049
doi: 10.1111/obes.12087
Institutions and Firms’ Productivity: Evidence from
Electricity Distribution in the EU*
Elisa Borghi†, Chiara Del Bo‡ and Massimo Florio‡*
†Department of Economics, Universit`a Bocconi, Via Sarfatti 25, Milano, Italy
(e-mail: elisa.borghi@unibocconi.it)
‡Department of Economics, Management and Quantitative Methods, Universti`a degli Studi
di Milano, Conservatorio 7 20122, Milano, Italy (e-mail: chiara.delbo@unimi.it; massimo.
florio@unimi.it)
Abstract
Firms’ productivity is influenced by internal and external institutions. Ownership is the
core internal institutional feature of the firm, while the most important external institu-
tional feature is the quality of government, which shapes the environment in which firms
operate. We explore the relative role of these factors and their interaction in determining to-
tal factor productivity of electricity distribution firms in 16 EU countries. Using data from
the Amadeus database of balance-sheet information and from the Quality of Governance
database, we find that when the quality of government is poor, public ownership is asso-
ciated with lower productivity levels; however, public ownership is associated with higher
productivity in countries characterized by higher quality of the institutional environment.
I. Introduction
Should the public sector or the government be directly involved, through state-owned or
state-controlled enterprises,1in the production of goods and services of general interest,
such as electricity, transport, water, environmental services and telecommunications? A
large empirical literature has grown over the years investigating the role of ownership as
a determinant of firm performance and productivity; despite the huge number of articles
on this subject, results are mixed, as some researchers find a negative effect of public
ownership on productivity while others do not find a statistically significant difference in
productivity between publicand private firms, or even find better outcomes for state-owned
ones in some industries. On the other hand, recent empirical studies at an aggregate level
of analysis have stressed the importance of the institutional environment for productivity
and economic performance. While the external institutional environment may affect the
JEL Classification numbers: D24; O17; G32
*The authors thank the participants at the X Milan European EconomyWorkshop, 2011 for comments on an earlier
version. Helpful suggestions by two anonymousreferees are g ratefullyacknowledged. The usual disclaimer applies.
1In the remainder of the paper, we will refer to publicly controlled firms as public firms.
Institutions and firms’ productivity 171
activity of economic agents in general, it can have a differentiated impact on private and
public firms, as they are characterized by specific objectives and constraints.
This paper is aimed at analysing the effect of ownership on firm-level productivity,
taking into consideration the role played by the institutional environment in which firms
operate. In particular, we assess whether the difference, if any, in productivity between
public and private firms is related to the quality of governance and the rule of law of the
country.
In many countries, governmentsare directly involved in the provisionof ser vices of gen-
eral interest, such as, for example, energy, transport, water and solid waste collection. While
privatization has been widely advocated and implemented as one way to improve the in-
centive structure of firms, hence their performance, public enterprises are still widespread,
particularly in Europe. As documented byThe Economist (11–17 January 2014, p. 7):
‘State-owned enterprises in OECD countries are worth around USD 2 trillion. Then there
are minority stakes in companies, plus USD 2 trillion or so in utilities and other assets held
by local governments.’
Moreover, during the global economic crisis of 2008, we have witnessed a greater
direct involvement of governments of developed and emerging countries in economic
activities: for example, around 2010, more than 10% of firms in the Forbes Global 2000
list are state-owned (Kowalski et al., 2013; Florio, 2014). Firms in this group include major
corporations in different countries such as China, India, Brazil, Russia, Turkey, but also
France, Italy, Germany, Swedenand several others in Europe. Thus, understanding whether
state ownership is related to firm-level economic performance is a still a relevant research
question world-wide.
A traditional strand of literature has focused on the comparison of performance of
public and private firms. In recent years, several scholars have analysed this issue from
an empirical and econometric perspective, taking advantage of the increase in firm-level
data availability. Empirical studies have focused on the performance, profitability and
labour demand behaviour of state-owned firms with respect to private ones with different
methodologies, indicators and focusing on different time and country samples.
In terms of profitability, Dewenter and Malatesta (2001) show that, in a large cross-
country and cross-sector comparison, government-owned enterprises tend to display lower
profitability, measured with financial data, with respect to their private counterparts and
tend to hire more labour. However, they also show that privatization is not necessar-
ily accompanied by increases in performance measures (especially based on earnings).
This result adds on to Boardman and Vining (1989), who stress the importance of mar-
ket structure and suggest that public firms are less efficient than similar private enter-
prises if operating in a competitive environment.Analogously, Vickers and Yar row (1988)
explain differences in efficiency between public and private firms in terms of market
structure.
Taking advantage of the widespread wave of privatization since the 1980s, Megginson
and Netter (2001) and Megginson (2005) document a productivity advantage of private
firms with respect to public ones. On the other hand, several authors (e.g. Millward, 1988;
Parker and LiangWu, 1998; Willner, 2001) havefound no statistically significant difference
or even a productivity advantage for public firms over private ones.
©2014 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd
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