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Oct 13, 2020 2020-10 Business Administration Faculty Research in Education

The surprising upside of state-owned enterprise

When the US government took a multi-billion-dollar stake in the automotive industry during the Great Recession, it was a temporary deal — a socialist experiment in a capitalistic world. But in many countries, state-owned enterprises are the norm, especially in sectors like transportation and utilities. How government ownership affects these companies and their operations has long been of interest to Carlos Inoue, assistant professor of business administration at Gies College of Business.

“When you look around the globe, you see that state ownership is highly relevant, particularly in infrastructural sectors,” said Inoue. “One of my first research projects tried to understand the conditions in which investments by the government can positively affect the performance of those firms.”

The entire idea is anathema to free-market thinkers, who tend to view government involvement as — at best — a necessary evil. Hampered by government interference and unmoored from the forces that punish inefficiency, SOEs can become cumbersome giants that underperform their free-market peers. But, according to Inoue, there are times where a little state ownership can actually be a very good thing.

In his research, which used data from publicly traded firms in Brazil, Inoue found that when governments have a minority ownership — and there are sufficient corporate governance mechanisms to restrict political interference — firms can benefit from public investment. For one thing, governments can provide much-needed capital in areas where financial markets are poorly developed. And for another, they can be far more patient than private investors, enabling companies to invest in promising entrepreneurial projects that may not pay out until 10 or 20 years down the road. Still, there’s a point where the benefits of government ownership are exceeded by the demands they impose, and Inoue has explored those situations as well.

One of his research projects began when he noticed a negative trend that followed a cyclical pattern. “Close to elections, I observed that the performance of state-owned utilities tends to go down.” said Inoue.  Upon closer investigation, he also discovered a spike in employment in election years, which seems to indicate that governments were boosting employment numbers to bolster their re-election chances. “Sometimes they are political supporters, sometimes they’re family and friends. So, you’re pushing employment in these firms while you’re not seeing any benefits in terms of service delivery.”

In his strategic business courses at Gies, Inoue hopes to help students make these kinds of connections and understand the broad implications of every business decision. “It’s not just about looking at profits, but looking at other social outcomes as well, thinking about access to clean water, or access to healthcare and thinking about how firms shape the trajectory of their workers over time.”

Inoue, who recently completed a PhD in strategic management at the University of Toronto’s Rotman School of Management says he was drawn to Gies both by its reputation and the opportunities it affords. And he looks forward to being part of the faculty training the next generation of business leaders.  

“I think what I bring to Gies is this excitement and energy to work on what I think are important questions — not only important questions for society, but actually questions in which the field of strategic business management can help address some of these challenges,” said Inoue. “I want students to develop a sense that they can have a structural impact on society, whatever sector or industry they decide to pursue.”