The performance of public enterprises is influenced by the interaction of three groups whose motivations are different. Basing the study on the “property rights approach,” I was concerned with individual behavior and set up appropriate models. That is to say, the first group, shareholders, maximized profits in a monopolistic or oligopolistic market structure. The second group, managers, maximized their utility which included staff preference based on the principle of separation of ownership from control and the existence of the principal-agent relationship, and finally the third group, the government, intervened or regulated public enterprises with a view to maximizing social welfare.
Having got hold of the factors determining performance from the above models, these were then integrated and a model was set up for running OLS regressions, using data on state-owned enterprises (SOEs) belonging to the Ministry of Economic Affairs, Republic of China. The empirical results indicated that the government’s intervention in pricing, investment, and purchasing in SOEs significantly decreased the profitability of SOEs. Over-expenditure on staffing was found to be significantly negatively related to profitability.
Over-investment decreased the profit rate, but only proved significant in some cases. Profitability and the price elasticity of demand were found to be negatively correlated though not significantly. Profitability and market share (or market concentration) were also found to be significantly positively correlated in some cases.
