Competitive intensity and technical efficiency in public sector firms: evidence from India

Reports that transfer of ownership from government to private hands is touted as the only way to eliminate inefficiencies in the public sector. Argues that the alternative approach ‐ increasing competitive intensity through decontrol of restricted industries without changing ownership to private investors ‐ is likely to provide similar efficiency gains. Examines this hypothesis empirically in the context of state‐owned manufacturing enterprises in India that face effective competition from private sector firms. Shows, from analysis of variance of efficiency indicators of a longitudinal sample of 108 firms over the period 1988‐1992, that increasing levels of competition trigger corresponding increases in the overall level of technical efficiency of state‐owned enterprises that face competitive conditions. Provides a persuasive case for introducing competitive markets as an alternative to complete privatization, especially in monopolisitc settings.