Definition
A State-Owned Enterprise (SOE) is a legal entity that is created by the government in order to partake in commercial activities on the government’s behalf. It is fully or partly owned by the state, hence the government directly controls and oversees its operations. SOEs can operate in various sectors such as utilities, transportation, natural resources, and healthcare.
Key Takeaways
- State-Owned Enterprises (SOEs) are businesses that are owned and operated by the government, making them a significant component of the public sector. They may facilitate public services that are considered critical to the economy, such as transportation, power, and communication.
- SOEs are subject to governmental influence and control. This means they can serve broader social objectives beyond profitability. However, they can also be subject to challenges such as corruption, inefficiencies or political interference.
- Last but not least, state-owned enterprises can have significant economic impact. They can drive job creation and infrastructure development, especially in developing countries. However, they may also distort competition in certain markets if they benefit from state backing to a significantly greater extent than private competitors.
Importance
The finance term, State-Owned Enterprise (SOE), is important as it refers to a commercial entity that is owned and managed by the government. This can be at a local, regional, or national level.
The significance of SOEs lies in their impact on the economy and public service provision. State ownership allows governments to ensure the delivery of public goods or services, particularly in vital industries like infrastructure, utilities, healthcare, and education, where private sector involvement may not be desirable or sufficient.
Additionally, as they are funded by taxpayers’ money, they face additional scrutiny for their performance and need to balance commercial objectives with broader socio-economic goals. Hence, the understanding of SOEs is crucial in the context of public finance, economic policy, and management.
Explanation
State-Owned Enterprises (SOEs), also known as public corporations or government owned corporations, play a crucial role across the globe in delivering numerous public services and driving economic development. They are entities established by a government to engage in commercial activities on its behalf, typically in market sectors that are thought to be important to the state’s strategic objectives. SOEs are specifically utilized to address market failures, provide public goods, or to serve specific social and economic objectives of the government.
For example, governments can create SOEs to provide essential infrastructure, utilities, or resources that are either not profitable or too important to be left to market forces. In many developing and emerging economies, state-owned enterprises are used as important instruments of national development. They may be used to promote industrialization, develop strategic sectors, foster regional development or provide goods and services to people that the private sector is not able to serve effectively or affordably, such as rural and poor communities.
They can be used as tools for job creation or for spreading wealth more evenly across society. They can be powerful tools for governments to use when striving for social, economic, or strategic goals. However, they also pose challenges and risks, including potential inefficiencies and corruption, if not well managed.
Examples of State-Owned Enterprise
PetroChina: Founded in 1999, PetroChina is a Chinese oil and gas company, which is majority owned by the state through the China National Petroleum Corporation. It is one of the world’s largest companies in terms of revenue and has significant operations in the exploration, development, production, and sale of crude oil and natural gas.
Deutsche Bahn: The German railway company Deutsche Bahn is another example of a state-owned enterprise. Although it operates in a competitive market, the German state is its sole shareholder. Deutsche Bahn offers various types of transportation services, including regional and long-distance trains as well as freight transport.
Saudi Aramco: Saudi Arabian Oil Company, better known as Saudi Aramco, is one of the largest oil companies globally and is entirely owned by the Saudi Arabian government. It leads the world in oil production and reserves, and in 2019, it held the largest initial public offering (IPO) in history, reinforcing its heavyweight status in global commerce.
FAQs on State-Owned Enterprise
What is a State-Owned Enterprise?
A State-Owned Enterprise (SOE) refers to a legal entity that is created by the government in order to partake in commercial activities on the government’s behalf. It can be wholly or partially owned by the government.
What is the purpose of a State-Owned Enterprise?
The primary purpose of a state-owned enterprise is to participate in the commercial market on a domestic and international scale. They are established and run by the government, allowing public sector entry into the market.
What are examples of State-Owned Enterprises?
Some examples of state-owned enterprises include national postal services, railway systems, or more globally recognized corporations such as PetroChina and Sberbank. These entities are all partially or fully owned by their respective governments.
How are State-Owned Enterprises governed?
State-Owned Enterprises are governed by a board of directors which is usually appointed by the government. This board is responsible for the formulation and implementation of the company’s strategies. The day to day operations are typically handled by a CEO and a team of management staff.
What are the benefits and challenges of State-Owned Enterprises?
The benefits of State-Owned Enterprises include increased control by the government over strategic industries, possible provision of public goods, and potentially safeguarding national security. On the other hand, challenges faced by SOEs might include inefficiencies due to less competitive pressure, potential for corruption, or issues with governance and transparency.
Related Entrepreneurship Terms
- Public Sector Undertaking (PSU)
- Nationalization
- Government-Owned Corporation
- Privatization
- Fiscal Policy
Sources for More Information
- Investopedia: A leading source of financial information and investing dictionary with comprehensive and reliable financial dictionary with over 5,000 definitions and 20,000 articles.
- World Bank: It provides financial and technical assistance to developing countries and it’s a great source for comprehensive information about finance and economics, including state-owned enterprises.
- OECD (Organisation for Economic Co-operation and Development): International organisation that work to build better policies for better lives. They provide information and data on a wide variety of topics including state-owned enterprises.
- International Monetary Fund (IMF): An international organization that provides financial assistance and advice to member countries. This site offers deep economic analysis and comprehensive coverage of financial topics, including state-owned enterprises.
