When governments own firms: toward a more nuanced understanding of the influence of state ownership on firm performance

Purpose The purpose of this study is to investigate how state owned enterprises can utilize their ownership structure to overcome the liability of poor institutions. When states take over ownership the conventional insight holds that control is shifted from the marketplace to a centralized unit. This decreases the fiscal and operational discipline of the firm, as well as the access to the distributed information found in the marketplace. In other words, private ownership is a huge advantage when markets are well-functioning and thick. However, what seems to be missing in this argument is how this would play out when markets are not functioning well (e.g. being immature, thin or lacking). When firms are not able to completely rely on access to capital and resources in a well-functioning market, the advantage of private ownership hits a boundary condition. Design/methodology/approach This study used a multilevel approach to analyze a unique panel data set of 2,901 companies observed between 2007 and 2014 across 25 emerging and developing countries. The results indicate that firms with state ownership stakes outperform privately owned firms in the presence of institutional voids. Findings The authors find that when a public sector entity owns a stake in for-profit companies, the state can act as substitute for market access to resources. This effect, however, is simply a substitute for poor economic institutions such as financial- and factor markets and is thus most pronounced in contexts with low-quality institutions. Research limitations/implications By assessing prevailing assumptions about state ownership’s impact on firm performance, this study drew on insights from institutional theory (IT) and political connection literature to argue that state ownership can facilitate access to institutional resources crucial for firm performance, often through political connections. The findings underscore the need for a theoretical framework that accounts for firm-specific and contextual differences, such as ownership structures, board composition and the extent of institutional voids. Practical implications The findings suggest that state ownership can be an effective mechanism for firms navigating institutional voids, offering policymakers a valuable tool to enhance market stability and facilitate capital access in such environments. Policymakers may consider supporting public–private partnerships and establishing frameworks that incentivize state-owned enterprises (SOEs) to operate in underserved regions where private sector engagement is limited. These insights are particularly relevant for developed and emerging economies and may guide policy decisions that aim to leverage state ownership in overcoming market inefficiencies and fostering private sector growth. Originality/value Departing from the conventional notion that state ownership is “bad for business,” this study builds on insights from IT and transaction cost economics to argue that there are important contingencies to this claim. Specifically, this study uses the concept of political connections to explain how SOEs can bridge the institutional void in the face of poor institutional.