Institutions Matter Differently Depending on the Ownership Types of Firms: Interacting Effects on Firm Productivity in China

Ownership and institutions are regarded as key determinants of firm performance. Using data of Chinese firms from 1998 to 2009, this study tests the separate and interacting effects of ownership and institutions. The divergent performance of firms can be explained from the heterogeneous ownership context, as confirmed by the literature, and through variations in the way that firms of different ownership types use and exploit institutions. Privately owned firms tend to exploit considerably larger benefits from the same institutions in comparison with foreign-owned enterprises (FEs) or state-owned enterprises (SOEs). FEs or SOEs also obtain some benefits; however, these benefits are significantly smaller than those obtained by private enterprises (PEs). Results can be attributed to the differences in the aims and incentives of firms with diverse ownership types. While the initial productivity of PEs may be lower than that of FEs at the low levels of institutional development, PEs are shown to eventually catch up with FEs because institutions develop further over time to be better exploited by PEs than FEs. Hence, any policy design should consider this coevolving nature of institutions and firm ownership; whereas private firms cannot prosper without sound institutions, institutional development may be useless unless there are private firms that can benefit from this institutional development.