Government Assistance and Total Factor Productivity: Firm-level Evidence from China

Harris, R.; Li, S.

Abstract

Industrial policy, particularly through the provision of large-scale assistance to industry in the form of ‘tax holidays’ and subsidies to firms, is very important in China. A major contribution of this paper is to introduce firm-level measures of assistance directly into industry-level production functions determining firm output using Chinese firm-level panel data for 1998-2007 and analysing the impact of government assistance on TFP at the firm-level. Our results indicate inverted U-shaped gains from assistance: across the 26 industries considered, firms receiving assistance rates of 1-10%, 10-19%, 20-49% and 50+% experienced on average 4.5%, 9.4%, 9.2% and -3% gains in TFP level, respectively. We then decompose the growth of TFP and relate it to assistance and formal political connections between firms and the government. We find in general firms receiving assistance contributed relatively more to TFP growth than non-assisted firms. However, this was largely through new firms being ‘encouraged’ to start-up rather than through firms open throughout 1998 to 2007 improving. There is also evidence that closure rates were truncated as a result of assistance. Moreover, the better results for assisted firms was very much ‘driven’ by a sub-group that received assistance but had no formal political connections and were not State-owned.

Citation

Harris, R., & Li, S. (2019). Government Assistance and Total Factor Productivity: Firm-level Evidence from China. Journal of Productivity Analysis, 52(1-3), 1-27. https://doi.org/10.1007/s11123-019-00559-4

• Journal Article Type: Article
• Acceptance Date: Oct 1, 2019
• Online Publication Date: Nov 1, 2019
• Publication Date: Dec 31, 2019
• Deposit Date: Oct 2, 2019
• Publicly Available Date: Nov 15, 2019
• Journal: Journal of Productivity Analysis
• Print ISSN: 0895-562X
• Electronic ISSN: 1573-0441
• Publisher: Springer
• Peer Reviewed: Peer Reviewed
• Volume: 52
• Issue: 1-3
• Pages: 1-27
• DOI: https://doi.org/10.1007/s11123-019-00559-4
• Public URL: https://durham-repository.worktribe.com/output/1319870