Leviathan in Business: Varieties of State Capitalism and their Implications for Economic Performance
Executive Summary — State capitalism, the widespread influence of the government in the economy, still looms large in developed and developing countries after over two decades of extensive state reform and privatization. Research by Aldo Musacchio and Sergio G. Lazzarini documents the extent and reach of state capitalism around the world and explores the economic implications of these new forms of state capitalism. There are three key arguments: First, state capitalism in the twenty-first century combines majority ownership of state-owned enterprises with a hybrid form that includes minority equity investments as well as other forms of support for private firms (such as subsidized loans). Second, all of those forms are present around the world, both in rich and poor countries, and in most cases they co-exist. Although some countries appear to have a prevalence of the minority investor mode while other countries emphasize the majority mode, in most cases the two modes jointly occur. Third, the emergence of those modes is explained by a host of environmental, political, and historical factors; and the economic performance of each mode depends on certain contingencies that should affect their benefits and costs, such as the economic distortions that they may generate. Key concepts include:
- The form of state capitalism prevailing in the twenty-first century is different from that observed in the second half of the twentieth century.
- Governments, particularly in emerging markets, have justified the rise of such forms of hybrid capitalism as a way to solve market failures. Private companies, in contrast, see the rise of new state-owned enterprises, firms with minority government ownership, and private companies backed by loans of development banks as threats.
- Whether forms of state capitalism are regarded as benign or pernicious, very little has been known about these new forms of government intervention. Questions remain about the various institutional mechanisms by which states exercise control, why state capitalism reemerged and in which form, and its effects on both firm performance and state governance.
In this paper we document the extent and reach of state capitalism around the world and explore its economic implications. We focus on governmental provision of capital to corporations—either equity or debt—as a defining feature of state capitalism. We present a stylized distinction between two broad, general varieties of state capitalism: one through majority control of publicly traded companies (e.g. state-controlled SOEs) and a hybrid form that relies on minority investments in companies by development banks, pension funds, sovereign wealth funds, and the government itself. We label these two alternative modes Leviathan as a majority investor and Leviathan as a minority investor, respectively. Next we differentiate between these two modes by describing their key fundamental traits and the conditions that should make each mode more conducive to development and superior economic performance.