Do State-Owned Enterprises Crowd Out Private Investment?: Firm Level Evidence from Malaysia

Private investment in Malaysia has been sluggish since the Asian Financial Crisis. One explanation is that the growing presence of state-owned enterprises (SOEs) or government-linked corporations (GLCs) has been crowding out private investment. For the first time, we provide empirical evidence on the relationship between GLC presence and private investment, employing a unique database covering 443 firms between 2007 and 2011. We find that when GLCs are dominant in an industry, investment by private firms is significantly negatively affected. Conversely, when GLCs do not dominate an industry, the impact on private investment is not seen. Sensitivity tests associated with varying the level of the threshold used to determine dominance confirm the robustness of the results. To revive private investment in Malaysia, the government must not only redress its growing fiscal deficit, but also expedite its programme of divestment.