The feasibility of privatization and foreign penetration

- We show that partial privatization is optimal for small extent of foreign penetration.
- The optimal degree of privatization is not monotonically related to foreign penetration.
- This result is in sharp contrast to the existing works, which suggest either the positive or negative relationship.
- Using a linear demand model, the optimal policy can be full nationalization once the extent of foreign penetration is large.

Partial privatization is implementable only if private investors have incentives to purchase the shares of public firms. With this obvious fact in mind, we reconsider the effect of foreign penetration on privatization policy. We show that partial privatization is optimal for small extent of foreign penetration and the optimal degree of privatization is not monotonically related to foreign penetration. This result is in sharp contrast to the existing works which suggest either the positive or negative relationship. Furthermore, using a linear demand model, we find that the optimal policy can be full nationalization once the extent of foreign penetration is large.