State capitalism

State capitalism describes economies in which firms sell in markets and seek profits, but the state owns or steers a large part of the capital: national oil companies, state banks, telecoms and utilities, holding companies and sovereign funds. It differs from central planning because prices and competition still allocate most goods; it differs from liberal capitalism because the state is a shareholder with political as well as financial goals.

Musacchio and Lazzarini (2014) distinguish three models:

• Leviathan as entrepreneur: the state owns and manages enterprises directly, often as majority owner.
• Leviathan as majority investor: listed firms with the state as controlling shareholder alongside private investors (for example Petrobras in Brazil).
• Leviathan as minority investor: the state holds minority stakes through development banks, pension or sovereign funds, and lends to private firms.

Common mechanisms include state-directed credit, golden shares, appointment of managers by ministries or the party, and the use of firms for policy goals such as employment, price controls or strategic investment.

Agency theory predicts weak performance when owners (citizens) cannot monitor their agents (politicians and managers). Shleifer (1998) argued that private ownership is generally preferable when cost reduction harms quality only modestly, competition is possible and reputation matters, because politicians use state firms to pursue political goals such as excess employment. Defenders argue that states can correct capital-market failures, finance long-horizon projects and capture rents for the public. Musacchio and Lazzarini argue that minority stakes can relieve credit constraints with fewer agency problems than full ownership, but are vulnerable to political capture.

• China's central state-owned enterprises, supervised by the State-owned Assets Supervision and Administration Commission, under the party's personnel system.
• National oil companies, from Norway's Equinor (majority state-owned, listed) to Saudi Aramco.
• Brazil's development bank BNDES as lender and minority shareholder.
• Singapore's Temasek Holdings as a state investment company holding stakes in listed firms.

When the state owns firms and also regulates their markets, it has a conflict of interest: it may shield its own firms from competition, soften their budget constraints or tilt regulation. The OECD's guidelines on state-owned enterprises respond by asking for a clear separation between the ownership function and the state's regulatory and policy functions. Critics also warn that state ownership can entrench ruling elites and mix commercial and political goals in ways that are hard to audit.

Megginson and Netter's survey of privatisation studies (2001) found that in most settings privatised firms became more efficient and profitable. But performance varies with governance: listed, professionally governed state firms can perform close to private peers, while politically managed ones often do not. Whether state capitalism helped late developers grow, or whether they grew in spite of it, is disputed.