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Throughout the world, governments have retained minority equity positions in several firms. However, firm-level performance implications of such stakes remain poorly understood. We offer a theory of minority state participation in less-developed markets and test our hypotheses using a database of 358 publicly traded firms in Brazil, where the government holds minority stakes in several companies through its subsidiary, BNDES (the Brazilian National Development Bank).  In line with our hypotheses, we find that having BNDES as a minority owner to increase firms’ return on assets. This result is possibly due to the reduction in capital constraints provided by BNDES’ long-term equity, without the downside of outright governmental interference given the minority nature of its participation.  However, we find that the effect of BNDES’ equity is reduced when it is associated with business groups, and has diminished over time probably due to improvements in capital market development.  Thus, our results suggest that minority state investments can have a positive effect on performance as long as they promote long-term investments in countries with less developed capital markets and are shielded from potential minority shareholder expropriation.  In this sense, our study contributes to the evolving discussion on how public policies and country-level institutions can explain firm-level performance heterogeneity.