DP14965 Barriers to Entry and Regional Economic Growth in China

Author(s): Loren Brandt, Gueorgui Kambourov, Kjetil Storesletten
Publication Date: June 2020
Keyword(s): capital distortions, China, convergence, Entry Barriers, Firm entry, growth, output distortions, SOE reform, transition
JEL(s): D22, D24, E24, O11, O14, O16, O40, O53, P25, R13
Programme Areas: Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14965

Labor productivity in manufacturing differs starkly across regions in China. We document that productivity, wages, and start-up rates of non-state firms have nevertheless experienced rapid regional convergence after 1995. To analyze these patterns, we construct a Hopenhayn (1992) model that incorporates location-specific capital wedges, output wedges, and entry barriers. Using Chinese Industry Census data we estimate these wedges and examine their role in explaining differences in performance and growth across prefectures. Entry barriers explain most of the differences. We investigate the empirical covariates of these entry barriers and find that barriers are causally related to the size of the state sector.