An unanswered question in the debate on public-sector inefficiency is whether reforms other than government divestiture can effectively substitute for privatization. Using a 1981–1995 panel data set of all public and private manufacturing establishments in Indonesia, we analyze whether public-sector inefficiency is primarily due to agency-type problems or to the environment in which public-sector enterprises (PSEs) operate, as measured by the soft budget constraint and the degree of internal and external competition. The results, obtained from fixed-effects specifications, provide support for both models. Ownership matters because, for a given level of government financing or competition, PSEs perform worse than their private-sector counterparts. The environment matters because only PSEs which received government financing or those shielded from import competition or foreign ownership performed worse than private enterprises. The results suggest that the efficiency of PSEs can be increased through privatization, through manipulation of the environment, or through a combination of both approaches.

Governments often promote inward foreign investment to encourage technology “spillovers” from foreign to domestic firms. Using panel data on Venezuelan plants, we find that foreign equity participation is positively correlated with plant productivity (the “own-plant” effect), but this relationship is only robust for small enterprises. We then test for spillovers from joint ventures to plants with no foreign investment. Foreign investment negatively affects the productivity of domestically owned plants. The net impact of foreign investment, taking into account these two offsetting effects, is quite small. The gains from foreign investment appear to be entirely captured by joint ventures. (JEL F2, O1, O3).

An ongoing debate in employment policy is whether promoting small and medium enterprises creates jobs. We use the elimination of small-scale industry (SSI) promotion in India to address this question. For 60 years, SSI promotion in India focused on reserving certain products for manufacture by small and medium enterprises. We identify the consequences for employment growth, investment, output, productivity, and wages of dismantling India's SSI reservations. We exploit variation in the timing of de-reservation across products and also measure the long-run impact of national SSI policy changes using variation in pretreatment exposure at the district level. Districts more exposed to de-reservation experienced higher employment and output growth. Entrants into the de-reserved product spaces and incumbents that were previously constrained by the size restrictions drove the increase in growth. The results suggest that dismantling India's SSI policies encouraged overall employment growth. (JEL E24, L25, L53, L60, O14, O25)