IDEAS home Printed from https://ideas.repec.org/a/kap/jproda/v52y2019i1d10.1007_s11123-019-00559-4.html
   My bibliography  Save this article

Government assistance and total factor productivity: firm-level evidence from China

Author

Listed:
  • Richard Harris

    (Durham University Business School)

  • Shengyu Li

    (UNSW Business School)

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.

Suggested Citation

  • Richard Harris & Shengyu Li, 2019. "Government assistance and total factor productivity: firm-level evidence from China," Journal of Productivity Analysis, Springer, vol. 52(1), pages 1-27, December.
    • Handle: RePEc:kap:jproda:v:52:y:2019:i:1:d:10.1007_s11123-019-00559-4
    DOI: 10.1007/s11123-019-00559-4
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11123-019-00559-4
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11123-019-00559-4?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Wenfeng Wu & Chongfeng Wu & Oliver M. Rui, 2012. "Ownership and the Value of Political Connections: Evidence from China," European Financial Management, European Financial Management Association, vol. 18(4), pages 695-729, September.
    3. Zhou, Wubiao, 2013. "Political connections and entrepreneurial investment: Evidence from China's transition economy," Journal of Business Venturing, Elsevier, vol. 28(2), pages 299-315.
    4. Chia-Hui Huang, 2015. "Tax credits and total factor productivity: firm-level evidence from Taiwan," The Journal of Technology Transfer, Springer, vol. 40(6), pages 932-947, December.
    5. Sourafel Girma & Yundan Gong & Holger Görg & Zhihong Yu, 2009. "Can Production Subsidies Explain China's Export Performance? Evidence from Firm‐level Data," Scandinavian Journal of Economics, Wiley Blackwell, vol. 111(4), pages 863-891, December.
    6. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, vol. 64(6), pages 1263-1297, November.
    7. David Roodman, 2009. "How to do xtabond2: An introduction to difference and system GMM in Stata," Stata Journal, StataCorp LP, vol. 9(1), pages 86-136, March.
    8. Heli Koski & Mika Pajarinen, 2015. "Subsidies, the Shadow of Death and Labor Productivity," Journal of Industry, Competition and Trade, Springer, vol. 15(2), pages 189-204, June.
    9. Li, Hongbin & Meng, Lingsheng & Wang, Qian & Zhou, Li-An, 2008. "Political connections, financing and firm performance: Evidence from Chinese private firms," Journal of Development Economics, Elsevier, vol. 87(2), pages 283-299, October.
    10. Luosha Du & Ann Harrison & Gary Jefferson, 2022. "FDI Spillovers and Industrial Policy: The Role of Tariffs and Tax Holidays," World Scientific Book Chapters, in: Globalization, Firms, and Workers, chapter 9, pages 215-232, World Scientific Publishing Co. Pte. Ltd..
    11. Brandt, Loren & Van Biesebroeck, Johannes & Zhang, Yifan, 2012. "Creative accounting or creative destruction? Firm-level productivity growth in Chinese manufacturing," Journal of Development Economics, Elsevier, vol. 97(2), pages 339-351.
    12. K. J. Arrow, 1971. "The Economic Implications of Learning by Doing," Palgrave Macmillan Books, in: F. H. Hahn (ed.), Readings in the Theory of Growth, chapter 11, pages 131-149, Palgrave Macmillan.
    13. Lucia Foster & John C. Haltiwanger & C. J. Krizan, 2001. "Aggregate Productivity Growth: Lessons from Microeconomic Evidence," NBER Chapters, in: New Developments in Productivity Analysis, pages 303-372, National Bureau of Economic Research, Inc.
    14. Philippe Aghion & Jing Cai & Mathias Dewatripont & Luosha Du & Ann Harrison & Patrick Legros, 2022. "Industrial Policy and Competition," World Scientific Book Chapters, in: Globalization, Firms, and Workers, chapter 15, pages 349-380, World Scientific Publishing Co. Pte. Ltd..
    15. Schwartz, Gerd & Clements, Benedict, 1999. "Government Subsidies," Journal of Economic Surveys, Wiley Blackwell, vol. 13(2), pages 119-147, April.
    16. Xia, Jun & Li, Shaomin & Long, Cheryl, 2009. "The Transformation of Collectively Owned Enterprises and its Outcomes in China, 2001-05," World Development, Elsevier, vol. 37(10), pages 1651-1662, October.
    17. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    18. Shunsuke Managi, 2010. "Productivity measures and effects from subsidies and trade: an empirical analysis for Japan's forestry," Applied Economics, Taylor & Francis Journals, vol. 42(30), pages 3871-3883.
    19. Tan, Justin & Li, Shaomin & Xia, Jun, 2007. "When iron fist, visible hand, and invisible hand meet: Firm-level effects of varying institutional environments in China," Journal of Business Research, Elsevier, vol. 60(7), pages 786-794, July.
    20. Jesus Felipe (ed.), 2015. "Development and Modern Industrial Policy in Practice," Books, Edward Elgar Publishing, number 16411.
    21. Dosi, Giovanni & Teece, David J. & Chytry, Josef (ed.), 1998. "Technology, Organization, and Competitiveness: Perspectives on Industrial and Corporate Change," OUP Catalogue, Oxford University Press, number 9780198290964.
    22. Irwin, Douglas A. & Klenow, Peter J., 1996. "High-tech R&D subsidies Estimating the effects of Sematech," Journal of International Economics, Elsevier, vol. 40(3-4), pages 323-344, May.
    23. Li, Hongbin & Zhou, Li-An, 2005. "Political turnover and economic performance: the incentive role of personnel control in China," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1743-1762, September.
    24. Mara Faccio, 2006. "Politically Connected Firms," American Economic Review, American Economic Association, vol. 96(1), pages 369-386, March.
    25. Elie Cohen, 2006. "Theoretical Foundations of Industrial Policy," Post-Print hal-03569433, HAL.
    26. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(2), pages 317-341.
    27. Bruce C. Greenwald & Joseph E. Stiglitz, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(2), pages 229-264.
    28. Elias Einiö, 2014. "R&D Subsidies and Company Performance: Evidence from Geographic Variation in Government Funding Based on the ERDF Population-Density Rule," The Review of Economics and Statistics, MIT Press, vol. 96(4), pages 710-728, October.
    29. Joseph E. Stiglitz & Justin Yifu Lin (ed.), 2013. "The Industrial Policy Revolution I," International Economic Association Series, Palgrave Macmillan, number 978-1-137-33517-3, December.
    30. Joseph E. Stiglitz & Justin Yifu Lin & Célestin Monga, 2013. "Introduction: The Rejuvenation of Industrial Policy," International Economic Association Series, in: Joseph E. Stiglitz & Justin Yifu Lin (ed.), The Industrial Policy Revolution I, pages 1-15, Palgrave Macmillan.
    31. Philip C. Hanke & Klaus Heine, 2015. "Subsidies and Corporate Governance – An Agency Approach," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 36(4), pages 256-264, June.
    32. Imbens,Guido W. & Rubin,Donald B., 2015. "Causal Inference for Statistics, Social, and Biomedical Sciences," Cambridge Books, Cambridge University Press, number 9780521885881.
    33. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    34. Haley, Usha C.V. & Haley, George T., 2013. "Subsidies to Chinese Industry: State Capitalism, Business Strategy, and Trade Policy," OUP Catalogue, Oxford University Press, number 9780199773749.
    35. Windmeijer, Frank, 2005. "A finite sample correction for the variance of linear efficient two-step GMM estimators," Journal of Econometrics, Elsevier, vol. 126(1), pages 25-51, May.
    36. Fan, Shenggen & Kanbur, Ravi & Wei, Shang-Jin & Zhang, Xiaobo (ed.), 2014. "The Oxford Companion to the Economics of China," OUP Catalogue, Oxford University Press, number 9780199678204.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Vu, Quang & Tran, Tuyen Quang, 2021. "Government financial support and firm productivity in vietnam," Finance Research Letters, Elsevier, vol. 40(C).
    2. Duong Hoang Vu & Drahomíra Pavelková & Milan Damborský, 2023. "Tax holidays and profit-repatriation rates for FDI firms: the case of the Czech Republic," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-12, December.
    3. Chao He & Lawrence Kryzanowski & Yunfei Zhao, 2023. "Political connections of Chinese fund management companies and fund performance," The Financial Review, Eastern Finance Association, vol. 58(3), pages 597-627, August.
    4. Li, Mingyang & Jin, Man & Kumbhakar, Subal C., 2022. "Do subsidies increase firm productivity? Evidence from Chinese manufacturing enterprises," European Journal of Operational Research, Elsevier, vol. 303(1), pages 388-400.
    5. Zhang, Weike & Meng, Jia & Tian, Xiaoli, 2020. "Does de-capacity policy enhance the total factor productivity of China's coal companies? A Regression Discontinuity design," Resources Policy, Elsevier, vol. 68(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Richard Harris & Shengyu Li, 2016. "Government Assistance and Total Factor Productivity: Firm-level Evidence from China, 1998-2007," CEGAP Working Papers 2016_04, Durham University Business School.
    2. Richard Harris & John Moffat, 2020. "The impact of product subsidies on plant‐level total factor productivity in Britain, 1997–2014," Scottish Journal of Political Economy, Scottish Economic Society, vol. 67(4), pages 387-403, September.
    3. Sai Ding & Alessandra Guariglia & Richard Harris, 2016. "The determinants of productivity in Chinese large and medium-sized industrial firms, 1998–2007," Journal of Productivity Analysis, Springer, vol. 45(2), pages 131-155, April.
    4. Richard Harris & Nigar Hashimzade & Sai Ding, 2016. "Political Connections, State Ownership and Productivity in China," CESifo Working Paper Series 6236, CESifo.
    5. Mao, Jie & Tang, Shiping & Xiao, Zhiguo & Zhi, Qiang, 2021. "Industrial policy intensity, technological change, and productivity growth: Evidence from China," Research Policy, Elsevier, vol. 50(7).
    6. Chen, Zhiyuan & Li, Yong & Zhang, Jie, 2016. "The bank–firm relationship: Helping or grabbing?," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 385-403.
    7. Carlos Carreira, 2013. "Learning, Exporting and Firm Productivity: Evidence from Portuguese Manufacturing and Services Firms," GEMF Working Papers 2013-23, GEMF, Faculty of Economics, University of Coimbra.
    8. Philipp Steinbrunner, 2023. "I want a quiet life! On productivity and competition in the Central European energy sector," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 31(2), pages 403-428, April.
    9. Roberto Ganau, 2016. "Productivity, Credit Constraints and the Role of Short-Run Localization Economies: Micro-Evidence from Italy," Regional Studies, Taylor & Francis Journals, vol. 50(11), pages 1834-1848, November.
    10. Harris, Richard & Moffat, John, 2011. "Plant-level determinants of total factor productivity in Great Britain, 1997-2006," LSE Research Online Documents on Economics 33561, London School of Economics and Political Science, LSE Library.
    11. Carlos Carreira & Luís Lopes, 2015. "Are Small Firms More Dependent on the Local Environment than Larger Firms? Evidence from Portuguese Manufacturing Firms," International Studies in Entrepreneurship, in: Rui Baptista & João Leitão (ed.), Entrepreneurship, Human Capital, and Regional Development, edition 127, chapter 0, pages 263-280, Springer.
    12. Richard Harris & John Moffat, 2015. "Plant-level determinants of total factor productivity in Great Britain, 1997–2008," Journal of Productivity Analysis, Springer, vol. 44(1), pages 1-20, August.
    13. Johanna Vogel, 2015. "The two faces of R&D and human capital: Evidence from Western European regions," Papers in Regional Science, Wiley Blackwell, vol. 94(3), pages 525-551, August.
    14. Petrick, Matin & Kloss, Mathias, 2013. "Identifying Factor Productivity from Micro-data: The case of EU agriculture," Factor Markets Working Papers 144, Centre for European Policy Studies.
    15. Chen, Minjia & Guariglia, Alessandra, 2013. "Internal financial constraints and firm productivity in China: Do liquidity and export behavior make a difference?," Journal of Comparative Economics, Elsevier, vol. 41(4), pages 1123-1140.
    16. Muhammad Haris & Hongxing Yao & Gulzara Tariq & Hafiz Mustansar Javaid & Qurat Ul Ain, 2019. "Corporate Governance, Political Connections, and Bank Performance," IJFS, MDPI, vol. 7(4), pages 1-37, October.
    17. Zhang, Dongyang & Liu, Deqiang, 2017. "Determinants of the capital structure of Chinese non-listed enterprises: Is TFP efficient?," Economic Systems, Elsevier, vol. 41(2), pages 179-202.
    18. Philipp Grunau, 2016. "The impact of overeducated and undereducated workers on establishment-level productivity," International Journal of Manpower, Emerald Group Publishing Limited, vol. 37(2), pages 372-392, May.
    19. Jamil, Nida & Chaudhry, Theresa Thompson & Chaudhry, Azam, 2022. "Trading textiles along the new silk route: The impact on Pakistani firms of gaining market access to China," Journal of Development Economics, Elsevier, vol. 158(C).
    20. Fritsch, Michael & Changoluisa, Javier, 2017. "New business formation and the productivity of manufacturing incumbents: Effects and mechanisms," Journal of Business Venturing, Elsevier, vol. 32(3), pages 237-259.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:jproda:v:52:y:2019:i:1:d:10.1007_s11123-019-00559-4. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.