There are two schools of thoughts on the important issue of reforming state-owned enterprises (SOEs). We call them the ownership school and the management school. The ownership school argues that the key to the reform is to diversify SOEs' ownership, including privatization, in order to eliminate government control of SOEs. The management school emphasizes the need to improve government's management of SOEs by, for example, granting SOE employees autonomy and profit incentives. Utilizing a data set of 680 SOEs in China, covering the period of 1980 to 1994, we test the relative effectiveness of these two kinds of reform measures. This is possible due to the fact that reform measures based on each of these two schools of thoughts were practised in China. Our results yield strong support for the ownership school while leaving very mixed evidence for the management school. Moreover, we find that the impact of ownership diversification was of the same order of magnitude on the economic performance of state enterprises as that of enhancing product market competition.
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