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Firm Entry and Regional Growth Disparities: the Effect of SOEs in China

Kjetil Storesletten (), Gueorgui Kambourov () and Loren Brandt ()

No 182, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: We study the effect of a large SOE (State-Owned Enterprises) sector on economic growth and document that localities (prefectures) in China with a large SOE sector in 1995 experienced a smaller economic growth than those with a small SOE sector in 1995. We show that one important mechanism through which the size of the SOE sector affects economic growth is the effect on firm entry in the non-SOE sector. In prefectures with a high SOE output share, non-SOE firm entry is small and the entrants have low TFP, labor productivity, and level of capital. We also infer the capital and output wedges that firms in the non-SOE and the SOE sector are facing in 1995 and 2004. We conclude that these wedges alone cannot account for the documented facts on non-SOE firm entry and that the analysis needs to incorporate a feature that would operate as a start-up cost (or an entry wedge). We build a heterogeneous firm model with endogenous entry to help understand the non-SOE entry patterns in the cross section in 1995. Then, we use the model to analyze the effect of a number of changes in the economic environment in China between 1995 and 2004.

Date: 2016
New Economics Papers: this item is included in nep-bec, nep-cna, nep-ent, nep-sbm, nep-tra and nep-ure
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