Industrial reform policies: does marketization enhance productivity more than privatization?

Placing state-owned firms into the private sector is understood to yield productivity gains, but this effect is seldom decomposed into changes in ownership (privatization) and changes in firm characteristics to match privately owned firms without changing ownership (marketization). This article presents an empirical assessment of Chinese firm-level data using a counterfactual design approach to identify if the Chinese ‘grasp the large and let go of the small’ industrial policy reform initiative reduced the efficiency gap between state-owned and non-state-owned enterprises and whether any gains were associated with privatization or marketization. Our empirical results show that marketization was associated with stronger increases in productivity than was privatization, suggesting that industrial reforms should consolidate assets, enhance cash flows, and reduce the need for external liquidity rather than focusing on changing ownership.