Determinants of privatization in China: The role of the presence of foreign firms*

•We examine the determinants of partial privatization.•We focus on foreign presence as a determinant.•We do so empirically.•We use the 2005 Enterprise Surveys of the World Bank.•It covers 12,400 Chinese firms located in over 100 cities.

This study investigates how the presence of foreign firms in a sector influences the privatization policy of domestic firms in that sector in China. We consider several variables to proxy for such a presence, from the perspective of the relative production scale, R&D and marketing, and labor productivity. By using the enterprise surveys carried out by the World Bank in 2005 of nearly 12,400 Chinese firms located in over 100 cities, we find that a rise in the presence of foreign firms increases the extent of the private ownership of domestic firms in a nonlinear fashion. Additionally, we apply IV-Tobit estimation with valid instruments and Tobit estimation with lagged key variables to deal with the possible endogeneity in the relationship between the presence of foreign firms and the privatization decision. Empirical evidence supports the main findings.