This sounds like an exam question, so what do you think? Does state ownership lead to superior performance? Does the government know best when it comes to meeting customer needs? How has state ownership usually worked out in the hospitality sector? Where on Earth might the state ownership of hotels still be a topic of conversation today?

The short answers are “No”, “No”, “Badly”, and “China”, but Dr Henry Tsai et al. from the Hong Kong Polytechnic University set out to examine the influence of different ownership structures on the performance of hotels in China in a recent study, and the findings are a little more complex than the executive summary given above.

China’s hotel sector has grown significantly since Deng Xiaoping came to power in 1978, when the country boasted just 16,000 hotel rooms. By 2014 that number had grown to 1.5 million, and tourism is now a very important part of the Chinese economy, and therefore worthy of close government attention. This increase has in part been due to the arrival in the market of international hotel chains permitted to enter under the Open Door policy, as well as domestic demand.

The state has maintained a strong interest in many publicly listed hotels, and while their performance has improved as the tourism sector has grown, they are still outperformed by privately owned hotels to the tune of around 10%. The researchers suggest that this poor level of performance can be attributed to a failure to separate the roles of management and ownership, with the result that the monitoring and control of the business can rather fall by the wayside.

In contrast, hotels in the developed world tend to attract institutional investors who in turn keep a close eye on management and can be very vocal when things are not run to their satisfaction. Private investors would, after all, much prefer to see the business thrive and their stock performance on the rise than have to cut their losses with an untimely exit.

The researchers do note that in the past twenty years, institutional investors have indeed been influential in China, helping to finance a shift away from state control in the hotel sector, yet the government continues to exert pressure by incentivizing investment and sometimes helping companies to secure funding in the securities markets. Effective monitoring is sometimes prevented by such arrangements, once again leading to poor performance.

One further consideration is that domestic and foreign institutional investors often bring about different outcomes. It is normally the case that foreign investment in developing economies can be highly beneficial as it brings financial, technological, and human expertise to boost performance. However, when the researchers analyzed six major Chinese hotel companies, it was found that as the institutional shareholding increased, whether foreign or domestic, there was an initial improvement in performance when adjusting to take other factors into account, but this was followed by decline. This was explained as an initial period of monitoring leading to improvements, but then as the size of the shareholding increases, it becomes ever more difficult or costly for the investor to exit the position if the business performs badly, and hence a kind of strategic agreement is reached between owners and operators which leads to poorer performance.

The three conclusions to take away from the study were first of all that state ownership is associated with negative performance trends, and therefore it would be wise for the Chinese government to withdraw from the sector while finding other ways to continue to lend support to the industry.

Secondly, it appears that there is a sweet spot for institutional ownership whereby anything between 17% and 25% brings about improved performance, but above that level the decline sets in.

Finally, while foreign investors are supposed to bring about improved performance as a result of the expertise they bring in terms of technological and operational know-how, they account for only around 3.5% of investment in China, and as such, their influence is too small for those potential benefits to be felt.

For China, it is apparent that the policy of opening up the country’s capital markets has not yet yielded the desired results, but if hotel companies can work to bring in more foreign investors as an alternative to state involvement, there is significant potential for growth as foreign influence will drive performance standards higher.

Chen, Ming-Hsiang, Tsai, Henry and Lv, Wan Qing. (2018). The Effects of Institutional Holdings and State Ownership on Hotel Firm Performance in China, Journal of China Tourism Research, 14(1), 20-41.