What Causes Privatization? Evidence from Import Competition in China.

This article investigates the role of product market competition as a causal driver of privatization among state-owned enterprises (SOEs) in China, using the trade liberalization shock induced by China's 2001 accession to the World Trade Organization (WTO). Exploiting heterogeneous tariff reductions across industries, the study employs a difference-in-differences approach on detailed firm-level data from 1999 to 2007 and finds that increased competition leads to a significant rise in private ownership and privatization of SOEs. The effect is stronger for SOEs operating in industries with larger technology and productivity gaps relative to frontier economies and in regions where SOEs impose heavier fiscal burdens on local governments. Additionally, privatization is more pronounced in provinces with better-developed market and legal institutions, suggesting that institutional quality facilitates private investment and ownership transformation under competitive pressures.