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Negative investment in China: financing constraints and restructuring versus growth

Sai Ding (), Alessandra Guariglia () and John B Knight

Working Papers from Business School - Economics, University of Glasgow

Abstract: This paper attempts to address a puzzle in China’s investment pattern: despite high aggregate investment and remarkable economic growth, negative net investment is commonly found at the microeconomic level. Using a large firm-level dataset, we test three hypotheses to explain the existence and extent of negative investment in each ownership group: what we term the efficiency (or restructuring) hypothesis, the (lack of) financing hypothesis, and the (slow) growth hypothesis. Our panel data probit estimations shows that negative investment by state-owned firms can be explained mainly by inefficiency: owing to over-investment or mis-investment in the past, these firms have had to restructure and to get rid of obsolete capital in the face of increasing competition and hardening budgets. The financing explanation holds for private firms, which have had to divest in order to raise capital. However, rapid economic growth weighs against both effects in all types of firms, with a larger impact for firms in the private and foreign sectors. A tobit model, estimated to examine the determinants of the amount of negative investment, yields similar conclusions.

Keywords: Negative investment; Divestment; Industrial restructuring; Financial constraints; Economic transition; China (search for similar items in EconPapers)
JEL-codes: G3 O16 O53 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cwa, nep-dev and nep-tra
Date: 2010-12
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Working Paper: Negative investment in China: financing constraints and restructuring versus growth (2010) Downloads
Working Paper: Negative investment in China: financing constraints and restructuring versus growth (2010) Downloads
Working Paper: Negative investment in China: financing constraints and restructuring versus growth (2010) Downloads
Working Paper: Negative investment in China: financing constraints and restructuring versus growth Downloads
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