We consider a state holding corporation with two plants that may produce complementary or substitute goods and that competes with one or two private firms. We find that the government partially privatizes the two plants of the state holding corporation and is indifferent between selling them partially to a single investor and to different investors. However, in the former case the government retains a greater (smaller) stake in the state corporation if goods are substitutes (complements).

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To examine the optimal privatisation of a state holding corporation when the government imposes a corporate profit tax on firms, we consider a multiplant state holding corporation producing differentiated goods, competing with firms in the private sector that may be uniplant or multiplant. This set up applies to many mixed markets. We find that the optimal privatisation depends on not only the degree of product substitution and the production organisation of firms in the private sector, but also on the profit tax imposed on firms. Specifically, the optimal privatisation degree increases with the profit tax imposed on firms. There is more privatisation when state holding corporations are sold to different investors than when they are sold to a single investor, and when firms in the private sector are multiplant than when they are uniplant. Given the degree of privatisation, the private sector reduces more of its production when responding to a higher profit tax rate. Moreover, the hypothesis of profit tax neutrality holds under the optimal degree of privatisation. The result suggests that the effect of the profit tax in mixed markets can be cushioned by privatisation.

We analyse why the Chinese government sets restrictions on foreign direct investment (FDI). We focus our analysis on the percentage of shares in relocated firms that the government allows to be foreign-owned. The government's decision on this percentage depends on the entry cost, the number of firms that relocate and the weight of the consumer surplus in the objective function of the government. We show that by its choice of this percentage, the Chinese government may restrict or encourage FDI to its country. We also find that if the government may subsidise the fixed entry cost, it provides a subsidy only when the producer surplus has a greater weight than the consumer surplus in weighted welfare. In that case, the subsidy encourages relocation by both firms and permits the government to allow a lower percentage of shares to be foreign-owned in relocated firms.