DP15763 Growing through Competition: The Reduction of Entry Barriers among Chinese Manufacturing Firms

Author(s):	Helu Jiang, Yu Zheng, Lijun Zhu
Publication Date:	February 2021
Keyword(s):	Endogenous Growth, Entry Barriers, Firm Dynamics, Firm entry
JEL(s):	D22, D43, O11, O30, O47
Programme Areas:	Development Economics, Macroeconomics and Growth
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=15763

Exploiting the gradualism of the Chinese economic reforms and cross-sectional variations in entry rates, we show empirical evidence from firm-level data that industries with higher entry rates achieve higher growth and a more competitive market structure in subsequent years. We then embed firm entry into a model of endogenous productivity and market structure with heterogeneous firms and sectors, and calibrate it to the Chinese manufacturing sector in 2004-7. We find the positive impact of entry on growth is achieved primarily through a pro-competitive effect, whereby entry induces endogenously a larger fraction of industries to be more competitive in the economy. We quantify the contribution on growth from the reduction of entry barriers associated with the state-owned enterprise reforms in the late 1990s and early 2000s and find it explains 20% of the aggregate growth of the manufacturing sector from 2004-7. More generally, we highlight the critical role of reducing entry barriers in promoting competition and growth in developing countries.