Kjetil Storesletten, UiO: Barriers to Entry and Regional Economic Growth in China

ESOP seminar. Kjetil Storesletten is a Professor at UiO. He will present a paper entitled ""Barriers to Entry and Regional Economic Growth in China", co-authored by Loren Brandt, and Gueorgui Kambourov.

Photo of Kjetil Storesletten

Kjetil Storesletten. Photo: UiO


We study the effect of a large SOE (State-Owned Enterprises) sector on economic growth. In particular, we document that localities (prefectures) in China that initially had larger SOE sectors experienced much lower economic growth than those with smaller ones. After the mid-1990s, this pattern is reversed. We next analyze the mechanisms through which the size of the SOE sector matters. An important channel is new non-state firm entry, which averaged 8 percent per annum. In prefectures with a high SOE output share, non-SOE entry is smaller, and entrants have lower TFP and labor productivity, and smaller capital stocks. We compute the capital and output wedges facing firms in 1995 and 2004, and conclude that: (i) these wedges alone cannot explain the documented facts on non-SOE firm entry; and (ii) 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. Finally, we use the model to analyze the effect of a number of important policy-related changes in the mid-1990s -- including efforts aimed at shutting down inefficient firms in the SOE sector, fiscal recentralization, and recapitalization of the state-owned banking system -- on entry costs, and new firm behavior and growth between 1995 and 2008. Our analysis suggests that sharply falling entry costs tied to SOE reform played an important role in economic convergence across prefectures.

Published Nov. 17, 2017 4:11 PM - Last modified Nov. 19, 2017 6:00 PM