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A state-owned enterprise (SOE) or government-owned enterprise (GOE) is a
business enterprise Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." Having a business name A trad ...
where the government or state has significant control through full, majority, or significant minority ownership. Defining characteristics of SOEs are their distinct legal form and operation in commercial affairs and activities. While they may also have
public policy Public policy is an institutionalized proposal to solve relevant and real-world problems, guided by a conception and implemented by programs as a course of action created and/or enacted, typically by a government A government is th ...
objectives (e.g., a state
railway company A railway company or railroad company is an entity that operates a railroad track or trains. Such a company can either be private or public In public relations and communication science, publics are groups of individual people, and the ...
may aim to make transportation more accessible), SOEs should be differentiated from government agencies or state entities established to pursue purely nonfinancial objectives.


Terminology

The terminology around the term state-owned enterprise is murky. All three words in the term are challenged and subject to interpretation. First, it is debatable what the term "state" implies (e.g., it is unclear whether
municipally owned corporationA municipally owned corporation is a corporation owned by a municipality. They are typically "organisations with independent corporate status, managed by an executive board appointed primarily by local government officials, and with majority public o ...
s and enterprises held by regional public bodies are considered state-owned). Next, it is contestable under what circumstances a SOE qualifies as "owned" by a state (SOEs can be fully owned or partially owned; it is difficult to determine categorically what level of
state ownership State ownership, also called government ownership and public ownership, is the ownership of an Industry (economics), industry, asset, or Business, enterprise by the State (polity), state or a public body representing a community as opposed to an ...
would qualify an entity to be considered as state-owned since governments can also own regular
stock In finance, stock (also capital stock) consists of all of the shares In financial markets A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities i ...

stock
, without implying any special interference). Finally, the term "enterprise" is challenged, as it implies statutes in private law which may not always be present, and so the term "corporations" is frequently used instead. Thus, SOEs are known under many other terms: state-owned company, state-owned entity, state enterprise, publicly owned corporation, government business enterprise, government-owned company, government-owned corporation,
government-sponsored enterprise A government-sponsored enterprise (GSE) is a type of financial services corporation created by the United States Congress. Their intended function is to enhance the flow of Credit (finance), credit to targeted sectors of the economy, to make those ...
, commercial government agency, state-privatised industry public sector undertaking, or parastatal, among others. In the
Commonwealth realms A Commonwealth realm is a sovereign state that has Elizabeth II as its monarch and head of state. Each realm functions as an independent state, equal with the other realms. In 1952, Elizabeth II was the monarch and head of state of seven in ...

Commonwealth realms
, particularly in Australia, Canada, New Zealand, and the United Kingdom, country-wide SOEs often use the term "Crown corporation", or "
Crown entity A Crown entity (from the Commonwealth term ''The Crown, Crown'') is an organisation that forms part of New Zealand's public sector organisations in New Zealand, state sector established under the Crown Entities Act 2004, a unique umbrella governance ...
", as cabinet ministers (
Ministers of the Crown Minister of the Crown is a formal constitutional term used in Commonwealth realms to describe a minister of the reigning sovereign or viceroy A viceroy () is an official who runs a polity in the name of and as the representative of the mo ...
) often control the shares in them. The term "government-linked company" (GLC) is sometimes used to refer to
corporate entities
corporate entities
that may be private or public (listed on a stock exchange) where an existing
government A government is the system or group of people governing an organized community, generally a state State may refer to: Arts, entertainment, and media Literature * ''State Magazine'', a monthly magazine published by the U.S. Departmen ...

government
owns a stake using a
holding company A holding company is a company whose primary business is holding a controlling interest in the securities of other companies. A holding company usually does not produce goods or services itself. Its purpose is to own shares of other companies ...
. The two main definitions of GLCs are dependent on the proportion of the corporate entity a government owns. One definition purports that a company is classified as a GLC if a government owns an effective controlling interest (more than 50%), while the second definition suggests that any corporate entity that has a government as a shareholder is a GLC. The act of turning a part of government bureaucracy into a SOE is called
corporatization Corporatization is the process of transforming and restructuring state assets, government agencies, public organizations, or municipally owned corporation, municipal organizations into corporations. It involves the adoption and application of bus ...
.


Use


Economic reasons


Natural monopolies

SOEs are common with
natural monopolies A natural monopoly is a monopoly A monopoly (from Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none) exists when a specific person or enterprise is the only supplier of a particular c ...

natural monopolies
, because they allow capturing
economies of scale 330px, As quantity of production increases from Q to Q2, the average cost of each unit decreases from C to C1. LRAC is the long-run average cost In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their sca ...

economies of scale
while they can simultaneously achieve a public objective. For that reason, SOEs primarily operate in the domain of infrastructure (e.g. railway companies), strategic goods and services (e.g. postal services, arms manufacturing and procurement), natural resources and energy (e.g. nuclear facilities, alternative energy delivery), politically sensitive business, broadcasting, banking,
demerit good In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods an ...
s (e.g.
alcoholic beverage An alcoholic drink is a drink A drink (or beverage) is a liquid A liquid is a nearly incompressible In fluid mechanics or more generally continuum mechanics, incompressible flow (isochoric process, isochoric flow) refers to a fluid f ...
s), and
merit goodThe concept of a merit good introduced in economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumptio ...
s (healthcare).


Infant industries

SOEs can also help foster industries that are "considered economically desirable and that would otherwise not be developed through private investments". When nascent or 'infant' industries have difficulty getting investments from the private sector (perhaps because the good that is being produced requires very risky investments, when patenting is difficult, or when
spillover effect In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods a ...
s exist), the government can help these industries get on the market with positive economic effects. However, the government cannot necessarily predict which industries would qualify as such 'infant industries', and so the extent to which this is a viable argument for SOEs is debated.


Political reasons

SOEs are also frequently employed in areas where the government wants to levy user fees, but finds it politically difficult to introduce new taxation. Next, SOEs can be used to improve efficiency of public service delivery or as a step towards (partial) privatization or hybridization. SOEs can also be a means to alleviate fiscal stress, as SOEs may not count towards states' budgets.


Effects


Compared to government bureaucracy

Compared to government bureaucracy, state owned enterprises might be beneficial because they reduce politicians' influence over the service. Conversely, they might be detrimental because they reduce oversight and increase
transaction costs In economics and related disciplines, a transaction cost is a cost in making any economic trade when participating in a Market (economics), market. Oliver E. Williamson defines transaction costs as the costs of running an economic system of companie ...
(such as monitoring costs, i.e., it is more difficult and costly to govern and regulate an autonomous SOE than it is the public bureaucracy). Evidence suggests that existing SOEs are typically more efficient than government bureaucracy, but that this benefit diminishes as services get more technical and have less overt public objectives.


Compared to regular enterprises

Compared to a regular enterprise, state-owned enterprises are typically expected to be less efficient due to political interference, but unlike profit-driven enterprises they are more likely to focus on public objectives.


Around the world

In
Eastern Europe Eastern Europe is the eastern region of . There is no consistent definition of the precise area it covers, partly because the term has a wide range of , geographical, ethnic, cultural, and connotations. , located in Eastern Europe, is both the ...

Eastern Europe
and
Western Europe Western Europe is the western region of Europe Europe is a continent A continent is any of several large landmasses. Generally identified by convention (norm), convention rather than any strict criteria, up to seven geographical r ...

Western Europe
, there was a massive
nationalization Nationalization (or nationalisation) is the process of transforming privately-owned asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangi ...
throughout the 20th century, especially after
World War II World War II or the Second World War, often abbreviated as WWII or WW2, was a global war A world war is "a war War is an intense armed conflict between states State may refer to: Arts, entertainment, and media Literatur ...
. In
Eastern Bloc The Eastern Bloc, also known as the Communist Bloc, the Socialist Bloc and the Soviet Bloc, was the group of socialist states of Central and Eastern Europe, East Asia, and Southeast Asia under the influence of the Soviet Union and its ideology ...
, countries adopted very similar policies and model to USSR. Governments in Western Europe, both left and right of centre, saw state intervention as necessary to rebuild economies shattered by war. Government control over so-called
natural monopolies A natural monopoly is a monopoly A monopoly (from Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none) exists when a specific person or enterprise is the only supplier of a particular c ...

natural monopolies
like
industry Industry may refer to: Economics * Industry (economics) In macroeconomics, an industry is a branch of an economy that produces a closely related set of raw materials, goods, or services. For example, one might refer to the wood industry ...
was the norm. Typical sectors included
telephones A telephone is a telecommunication Telecommunication is the transmission of information Information can be thought of as the resolution of uncertainty; it answers the question of "What an entity is" and thus defines both its esse ...
,
electric power Electric power is the rate, per unit time, at which electrical energy Electrical energy is energy derived as a result of movement of electrically charged particles. When used loosely, ''electrical energy'' refers to energy that has been conve ...
,
fossil fuels A fossil fuel is a hydrocarbon In organic chemistry, a hydrocarbon is an organic compound , CH4; is among the simplest organic compounds. In chemistry, organic compounds are generally any chemical compounds that contain carbon-hydrogen che ...
,
railways Rail transport (also known as train transport) is a means of transferring passengers and goods on wheeled vehicle A vehicle (from la, vehiculum) is a machine that transports people or cargo. Vehicles include wagons, bicycles, motor veh ...
,
airline An airline is a company that provides air transport services for traveling passenger A passenger (also abbreviated as pax) is a person who travels in a vehicle but bears little or no responsibility for the tasks required for that vehicle ...
s,
media Media may refer to: Physical means Communication * Media (communication), tools used to deliver information or data ** Advertising media, various media, content, buying and placement for advertising ** Broadcast media, communications deliv ...
,
postal services The mail or post is a system for physically transporting postcards, letter (message), letters, and parcel (package), parcels. A postal service can be private or public, though many governments place restrictions on private systems. Since the mid ...

postal services
,
bank A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), stat ...

bank
s, and
water Water (chemical formula H2O) is an , transparent, tasteless, odorless, and , which is the main constituent of 's and the s of all known living organisms (in which it acts as a ). It is vital for all known forms of , even though it provide ...
. Many large industrial corporations were also nationalized or created as government corporations, including, among many others:
British Steel Corporation British may refer to: Peoples, culture, and language * British people The British people, or Britons, are the citizens of the United Kingdom of Great Britain and Northern Ireland, the British Overseas Territories, and the Crown dependenc ...
,
Statoil Equinor ASA (formerly Statoil and StatoilHydro) is a Norwegian state-owned multinational energy company headquartered in Stavanger. It is primarily a petroleum Petroleum (), also known as crude oil and oil, is a #Latent heat of vaporization ...
and Irish Sugar.Starting in the late 1970s and accelerating through the 1980s and 1990s many of these corporations were
privatized Privatization (or privatisation in British English) can mean different things including moving something from the public sector into the private sector. It is also sometimes used as a synonym for deregulation when a heavily regulated private compa ...
, though many still remain wholly or partially owned by the respective governments.
A state-run enterprise may operate differently from an ordinary limited liability corporation. For example, in Finland, state-run enterprises (''liikelaitos'') are governed by a separate act. Even though responsible for their own finances, they cannot be declared
bankrupt Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor. ...

bankrupt
; the state answers for the liabilities. Stocks of the corporation are not sold and loans have to be government-approved, as they are government liabilities. In most
OPEC The Organization of the Petroleum Exporting Countries (OPEC, ) is an intergovernmental organization An intergovernmental organization (IGO) is an organization composed primarily of sovereign states (referred to as ''member states''), or o ...

OPEC
countries, the governments own the oil companies operating on their soil. A notable example is the
Saudi Arabian Saudis ( ar, سعوديون ''Suʿūdiyyūn'') or Saudi Arabians are a nation A nation is a community of people formed on the basis of a common language, history, ethnicity, or a common culture, and, in many cases, a shared territory. A nation ...

Saudi Arabian
national oil company,
Saudi Aramco Saudi Aramco ( ar, أرامكو السعودية '), officially the Saudi Arabian Oil Company (formerly Arabian-American Oil Company), is a Saudi Arabia (''Shahada'') , national_anthem = "National Anthem of Saudi Arabia, " "Nation ...
, which the Saudi government bought in 1988, changing its name from Arabian American Oil Company to Saudi Arabian Oil Company. The Saudi government also owns and operates
Saudi Arabian Airlines Saudia ( ar, السعودية '), formerly known as Saudi Arabian Airlines (), is the flag carrier A flag carrier is a transport Transport (commonly used in the U.K.), or transportation (used in the U.S.), is the Motion, movement of hu ...

Saudi Arabian Airlines
, and owns 70% of
SABIC Saudi Basic Industries Corporation ( ar, الشركة السعودية للصناعات الأساسية), known as SABIC ( ar, سابك), is a Saudi Arabian multinational Multinational may refer to: * Multinational corporation, a corporate organ ...
as well as many other companies. In the EU directives were issued, and signed into law in member countries, that railway should be split into branches. So where everything from infrastructure to running the trains had been in one company (often owned by the local state or other authorities), now the various activities were to be separated into independent companies. A major motivation was to more easily enable free access to run trains in the various countries, and thereby increase competition and offer lower fees.


Economic theory

In economic theory, the question of whether a firm should be owned by the state or by the private sector is studied in the theory of
incomplete contracts In economic theory, the field of contract theory In economics Economics () is a social science Social science is the Branches of science, branch of science devoted to the study of society, societies and the Social relation, relati ...
that was developed by Oliver Hart and his co-authors. In a world in which complete contracts were feasible, ownership would not matter because the same incentive structure that prevails under one ownership structure could be replicated under the other ownership structure. Hart, Shleifer, and Vishny (1997) have developed the leading application of the incomplete contract theory to the issue of state-owned enterprises. These authors compare a situation in which the government is in control of a firm to a situation in which a private manager is in control. The manager can invest to come up with cost-reducing and quality-enhancing innovations. The government and the manager bargain over the implementation of the innovations. If the negotiations fail, the owner can decide about the implementation. It turns out that when cost-reducing innovations do not harm quality significantly, then private firms are to be preferred. Yet, when cost-reductions may strongly reduce quality, state-owned enterprises are superior. Hoppe and Schmitz (2010) have extended this theory in order to allow for a richer set of governance structures, including different forms of public-private partnerships.


See also


References


Citations


Sources

* .
Alternate location:
* .


Further reading


The Public Firm with Managerial Incentives
by Elmer G. Wiens. {{Authority control * Types of business entity