Privatization in extractive industry under foreign penetration

Abstract

This paper analyzes optimal privatization policy in exhaustible resource industry where a public domestic firm is less cost efficient than a private multinational firm. It is shown that the impact of foreign penetration on optimal privatization depends on the cost asymmetry between the public and private firm. If the cost efficiency gap is small, then the optimal rate of privatization is a decreasing function of foreign ownership of multinational firm. However, if the cost efficiency gap is large, then, contrasting to existing studies, the result is quite different: full nationalization is optimal if the foreign ownership of multinational firm is low but full privatization becomes optimal if this share is high. Under moderate cost asymmetry foreign penetration does not have any impact on privatization. It is also demonstrated that an increase in foreign penetration results in faster resource extraction by the public firm while an increase in the state share accelerates public firm extraction if it was initially too slow in comparison with the socially efficient path and slows down if it was initially too fast.