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Negative investment in China: financing constraints and restructuring versus growth

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  • John Knight
  • Sai Ding and Alessandra Guariglia

Abstract

This paper attempts to address a puzzle in China's investment pattern: despite high aggregate investment and remarkable economic growth, negative net investment is commonly found at the microeconomic level.� Using a large firm-level dataset, we test three hypotheses to explain the existence and extent of negative investment in each ownership group: what we term the efficiency (or restructuring) hypothesis, the (lack of) financing hypothesis, and the (slow) growth hypothesis.� Our panel data probit estimations shows that negative investment by state-owned firms can be explained mainly by inefficiency: owing to over-investment or mis-investment in the past, these firms have had to restructure and to get rid of obsolete capital in the face of increasing competition and hardening budgets.� The financing explanation holds for private firms, which have had to divest in order to raise capital.� However, rapid economic growth weighs against both effects in all types of firms, with a large impact for firms in the private and foreign sectors.� A tobit model, estimated to examine the determinants of the amount of negative investment, yields similar conclusions.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 519.

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Date of creation: 01 Dec 2010
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Handle: RePEc:oxf:wpaper:519

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Keywords: Negative investment; divestment; industrial restructuring; financial constraints; economic transition; China;

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Cited by:
  1. Minjia Chen & Alessandra Guariglia, . "Financial constraints and firm productivity in China: do liquidity and export behavior make a difference?," Discussion Papers 11/09, University of Nottingham, GEP.
  2. Paul Mizen & Serafeim Tsoukas, . "What Promotes Greater Use of the Corporate Bond Market? A Study of the Issuance Behaviour of Firms in Asia," Discussion Papers 12/17, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  3. Ding, Sai & Guariglia, Alessandra & Knight, John, 2010. "Does China overinvest? Evidence from a panel of Chinese firms," SIRE Discussion Papers 2010-110, Scottish Institute for Research in Economics (SIRE).
  4. Natasha Agarwal & Chris Milner & Alejandro Riaño, . "Credit Constraints and FDI Spillovers in China," Discussion Papers 11/21, University of Nottingham, GEP.

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