State-owned enterprise

A state-owned enterprise (SOE) is a business entity created or owned by a national or local government, either through an executive order or legislation. SOEs aim to generate profit for the government, prevent private sector monopolies, provide goods at lower prices, implement government policies, or serve remote areas where private businesses are scarce. The government typically holds full or majority ownership and oversees operations. SOEs have a distinct legal structure, with financial and developmental goals, like making services more accessible while earning profit (such as a state railway). They can be considered as government-affiliated entities designed to meet commercial and state capitalist objectives.

The terminology around the term state-owned enterprise is murky. All three words in the term are challenged and subject to interpretation. First, it is debatable what the term "state" implies (e.g., it is unclear whether municipally owned corporations and enterprises held by regional public bodies are considered state-owned). Next, it is contestable under what circumstances a SOE qualifies as "owned" by a state (SOEs can be fully owned or partially owned; it is difficult to determine categorically what level of state ownership would qualify an entity to be considered as state-owned since governments can also own regular stock, without implying any special interference). Finally, the term "enterprise" is challenged, as it implies statutes in private law which may not always be present, and so the term "corporations" is frequently used instead.

Thus, SOEs are known under many other terms: state-owned company, state-owned entity, state enterprise, publicly owned corporation, government business enterprise, government-owned company, government controlled company, government controlled enterprise, government-owned corporation, government-sponsored enterprise, commercial government agency, state-privatised industry public sector undertaking, or parastatal, among others. In some Commonwealth realms, ownership by The Crown is highlighted in the predominant local terminology, with SOEs in Canada referred to as a "Crown corporation", and in New Zealand as a "Crown entity".^{[citation needed]}

The term "government-linked company" (GLC) is sometimes used, for example in Malaysia, to refer to private or public (listed on a stock exchange) corporate entities in which the government acquires a stake using a holding company. The two main definitions of GLCs are dependent on the proportion of the corporate entity a government owns. One definition^{[citation needed]} purports that a company is classified as a GLC if a government owns an effective controlling interest (more than 50%), while the second definition^{[citation needed]} suggests that any corporate entity that has a government as a shareholder is a GLC.

The act of turning a part of government bureaucracy into a SOE is called corporatization.

In economic theory, the question of whether a firm should be owned by the state or by the private sector is studied in the theory of incomplete contracts developed by Oliver Hart and his co-authors. In a world in which complete contracts were feasible, ownership would not matter because the same incentive structure that prevails under one ownership structure could be replicated under the other ownership structure. Hart, Shleifer, and Vishny (1997) have developed the leading application of the incomplete contract theory to the issue of state-owned enterprises. These authors compare a situation in which the government is in control of a firm to a situation in which a private manager is in control. The manager can invest to come up with cost-reducing and quality-enhancing innovations. The government and the manager bargain over the implementation of the innovations. If the negotiations fail, the owner can decide about the implementation. It turns out that when cost-reducing innovations do not harm quality significantly, then private firms are to be preferred. Yet, when cost-reductions may strongly reduce quality, state-owned enterprises are superior. Hoppe and Schmitz (2010) have extended this theory in order to allow for a richer set of governance structures, including different forms of public-private partnerships.

SOEs are common with natural monopolies, because they allow capturing economies of scale while they can simultaneously achieve a public objective. For that reason, SOEs primarily operate in the domain of infrastructure (e.g., railway companies), strategic goods and services (e.g., postal services, arms manufacturing and procurement), natural resources and energy (e.g., nuclear facilities, alternative energy delivery), politically sensitive business, broadcasting, banking, demerit goods (e.g., alcoholic beverages), and merit goods (healthcare).^{[citation needed]}

SOEs can also help foster industries that are "considered economically desirable and that would otherwise not be developed through private investments". When nascent or 'infant' industries have difficulty getting investments from the private sector (perhaps because the goods that are being produced requires very risky investments, when patenting is difficult, or when spillover effects exist), the government can help these industries get on the market with positive economic effects. However, the government cannot necessarily predict which industries would qualify as such 'infant industries', and so the extent to which this is a viable argument for SOEs is debated.