IDEAS home Printed from https://ideas.repec.org/a/bla/acctfi/v62y2022i5p4807-4830.html
   My bibliography  Save this article

The rise of market power and firms' investment: Evidence from China

Author

Listed:
  • Bowen Zheng
  • Mengjie Zhang
  • Xuefang Zhang

Abstract

Following De Loecker et al. (2020) we characterise the evolution of market power based on listed firm data in the Chinese economy from 2000 to 2019. The increase is mainly driven by a few superstar firms. In addition, we find strong evidence of an inverted U‐shape relation between market power and investment. Increasing market power encourages competing firms to invest in beating the competition but discourages firms from investing in an unequal economy because of the decline in investment payoffs. These findings indicate that the superstar firm effect harms investment, resulting in a potential decline in the economic growth rate.

Suggested Citation

  • Bowen Zheng & Mengjie Zhang & Xuefang Zhang, 2022. "The rise of market power and firms' investment: Evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(5), pages 4807-4830, December.
    • Handle: RePEc:bla:acctfi:v:62:y:2022:i:5:p:4807-4830
    DOI: 10.1111/acfi.12990
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/acfi.12990
    Download Restriction: no
    File URL: https://libkey.io/10.1111/acfi.12990?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
    ---><---

    References listed on IDEAS

    as
    1. Thomas Piketty & Li Yang & Gabriel Zucman, 2019. "Capital Accumulation, Private Property, and Rising Inequality in China, 1978–2015," American Economic Review, American Economic Association, vol. 109(7), pages 2469-2496, July.
    2. Chun Chang & Kaiji Chen & Daniel F. Waggoner & Tao Zha, 2016. "Trends and Cycles in China's Macroeconomy," NBER Macroeconomics Annual, University of Chicago Press, vol. 30(1), pages 1-84.
    3. Inderst, Roman & Wey, Christian, 2007. "Buyer power and supplier incentives," European Economic Review, Elsevier, vol. 51(3), pages 647-667, April.
    4. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: an Inverted-U Relationship," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(2), pages 701-728.
    5. Francisco Requena Silvente, 2005. "Price Discrimination and Market Power in Export Markets: The Case of the Ceramic Tile Industry," Journal of Applied Economics, Taylor & Francis Journals, vol. 8(2), pages 347-370, November.
    6. Bulan, Laarni & Mayer, Christopher & Somerville, C. Tsuriel, 2009. "Irreversible investment, real options, and competition: Evidence from real estate development," Journal of Urban Economics, Elsevier, vol. 65(3), pages 237-251, May.
    7. Patterson, Paul M & Abbott, Philip C, 1994. "Further Evidence on Competition in the US Grain Export Trade," Journal of Industrial Economics, Wiley Blackwell, vol. 42(4), pages 429-437, December.
    8. Jenny, Frederic & Weber, Andre-Paul, 1983. "Aggregate Welfare Loss Due to Monopoly Power in the French Economy: Some Tentative Estimates," Journal of Industrial Economics, Wiley Blackwell, vol. 32(2), pages 113-130, December.
    9. Jan De Loecker & Jan Eeckhout & Gabriel Unger, 2020. "The Rise of Market Power and the Macroeconomic Implications [“Econometric Tools for Analyzing Market Outcomes”]," The Quarterly Journal of Economics, Oxford University Press, vol. 135(2), pages 561-644.
    10. Gisser, Micha, 1988. "Price Leadership and Welfare Losses in U.S. Manufacturing: Reply," American Economic Review, American Economic Association, vol. 78(1), pages 288-289, March.
    11. Chad Syverson, 2004. "Product Substitutability and Productivity Dispersion," The Review of Economics and Statistics, MIT Press, vol. 86(2), pages 534-550, May.
    12. Shaffer, Sherrill, 1982. "Competition, conduct and demand elasticity," Economics Letters, Elsevier, vol. 10(1-2), pages 167-171.
    13. Cowling, Keith & Mueller, Dennis C, 1978. "The Social Costs of Monopoly Power," Economic Journal, Royal Economic Society, vol. 88(352), pages 727-748, December.
    14. Posner, Richard A, 1975. "The Social Costs of Monopoly and Regulation," Journal of Political Economy, University of Chicago Press, vol. 83(4), pages 807-827, August.
    15. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    16. Nickell, Stephen J, 1996. "Competition and Corporate Performance," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 724-746, August.
    17. A. P. Lerner, 1934. "Economic Theory and Socialist Economy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 2(1), pages 51-61.
    18. Barney Hartman‐Glaser & Hanno Lustig & Mindy Z. Xiaolan, 2019. "Capital Share Dynamics When Firms Insure Workers," Journal of Finance, American Finance Association, vol. 74(4), pages 1707-1751, August.
    19. Chad Syverson, 2004. "Market Structure and Productivity: A Concrete Example," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1181-1222, December.
    20. repec:eme:mfppss:v:33:y:2007:i:3:p:195-209 is not listed on IDEAS
    21. Elena Patel & Nathan Seegert, 2020. "Does Market Power Encourage or Discourage Investment? Evidence from the Hospital Market," Journal of Law and Economics, University of Chicago Press, vol. 63(4), pages 667-698.
    22. David Autor & David Dorn & Lawrence F Katz & Christina Patterson & John Van Reenen, 2020. "The Fall of the Labor Share and the Rise of Superstar Firms [“Automation and New Tasks: How Technology Displaces and Reinstates Labor”]," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(2), pages 645-709.
    23. Jan de Loecker & Jan Eeckhout & Simon Mongey, 2021. "Quantifying Market Power and Business Dynamism in the Macroeconomy," Working Papers 1251, Barcelona School of Economics.
    24. Jan De Loecker & Jan Eeckhout, 2018. "Global Market Power," NBER Working Papers 24768, National Bureau of Economic Research, Inc.
    25. David Rezza Baqaee & Emmanuel Farhi, 2020. "Productivity and Misallocation in General Equilibrium," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(1), pages 105-163.
    26. Levin, Richard C, 1988. "Appropriability, R&D Spending, and Technological Performance," American Economic Review, American Economic Association, vol. 78(2), pages 424-428, May.
    27. R. David Mclean & Mengxin Zhao, 2014. "The Business Cycle, Investor Sentiment, and Costly External Finance," Journal of Finance, American Finance Association, vol. 69(3), pages 1377-1409, June.
    28. De Loecker, Jan, 2011. "Recovering markups from production data," International Journal of Industrial Organization, Elsevier, vol. 29(3), pages 350-355, May.
    29. Jaffe, Adam B, 1988. "Demand and Supply Influences in R&D Intensity and Productivity Growth," The Review of Economics and Statistics, MIT Press, vol. 70(3), pages 431-437, August.
    30. 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.
    31. Brander, James A. & Lewis, Tracy R., 1986. "Oligopoly and Financial Structure: The Limited Liability Effect," American Economic Review, American Economic Association, vol. 76(5), pages 956-970, December.
    32. Yoshikawa, Hiroshi, 1980. "On the "q" Theory of Investment," American Economic Review, American Economic Association, vol. 70(4), pages 739-743, September.
    33. Nicolas Crouzet & Janice C. Eberly, 2019. "Understanding Weak Capital Investment: the Role of Market Concentration and Intangibles," NBER Working Papers 25869, National Bureau of Economic Research, Inc.
    34. Daniel A. Ackerberg & Kevin Caves & Garth Frazer, 2015. "Identification Properties of Recent Production Function Estimators," Econometrica, Econometric Society, vol. 83, pages 2411-2451, November.
    35. Steven R. Grenadier, 2002. "Option Exercise Games: An Application to the Equilibrium Investment Strategies of Firms," The Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 691-721.
    36. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1991. "Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(1), pages 33-60.
    37. Turk Ariss, Rima, 2010. "On the implications of market power in banking: Evidence from developing countries," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 765-775, April.
    38. Bontempi, Maria Elena & Golinelli, Roberto & Parigi, Giuseppe, 2010. "Why demand uncertainty curbs investment: Evidence from a panel of Italian manufacturing firms," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 218-238, March.
    39. Ahn, Seoungpil & Denis, David J. & Denis, Diane K., 2006. "Leverage and investment in diversified firms," Journal of Financial Economics, Elsevier, vol. 79(2), pages 317-337, February.
    40. Chad Syverson, 2019. "Macroeconomics and Market Power: Context, Implications, and Open Questions," Journal of Economic Perspectives, American Economic Association, vol. 33(3), pages 23-43, Summer.
    41. Lindenberg, Eric B & Ross, Stephen A, 1981. "Tobin's q Ratio and Industrial Organization," The Journal of Business, University of Chicago Press, vol. 54(1), pages 1-32, January.
    42. Kadapakkam, Palani-Rajan & Kumar, P. C. & Riddick, Leigh A., 1998. "The impact of cash flows and firm size on investment: The international evidence," Journal of Banking & Finance, Elsevier, vol. 22(3), pages 293-320, March.
    43. Mariko Sakakibara & Michael E. Porter, 2001. "Competing At Home To Win Abroad: Evidence From Japanese Industry," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 310-322, May.
    44. Simcha Barkai, 2020. "Declining Labor and Capital Shares," Journal of Finance, American Finance Association, vol. 75(5), pages 2421-2463, October.
    Full references (including those not matched with items on IDEAS)

    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. repec:hal:wpspec:info:hdl:2441/5j3i17uo7399t940lrt6h6n545 is not listed on IDEAS
    2. Panon, Ludovic, 2022. "Labor share, foreign demand and superstar exporters," Journal of International Economics, Elsevier, vol. 139(C).
    3. repec:hal:spmain:info:hdl:2441/5j3i17uo7399t940lrt6h6n545 is not listed on IDEAS
    4. Ensar Yılmaz & Zeynep Kaplan, 2022. "Heterogeneity of market power: firm-level evidence," Economic Change and Restructuring, Springer, vol. 55(2), pages 1207-1228, May.
    5. Michał Gradzewicz & Jakub Mućk, 2020. "Unravelling the Markups Changes: The Role of Demand Elasticity and Concentration," KAE Working Papers 2020-056, Warsaw School of Economics, Collegium of Economic Analysis.
    6. Ganglmair, Bernhard & Hahn, Nadine & Hellwig, Michael & Kann, Alexander & Peters, Bettina & Tsanko, Ilona, 2020. "Price markups, innovation, and productivity: Evidence from Germany," ZEW Expertises, ZEW - Leibniz Centre for European Economic Research, volume 8, number 222995.
    7. Chen Yeh & Claudia Macaluso & Brad Hershbein, 2022. "Monopsony in the US Labor Market," American Economic Review, American Economic Association, vol. 112(7), pages 2099-2138, July.
    8. Jonathan Hambur, 2023. "Product Market Competition and its Implications for the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 99(324), pages 32-57, March.
    9. Gibbon, Alexandra J. & Schain, Jan Philip, 2020. "Rising markups, common ownership, and technological capacities," DICE Discussion Papers 340, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    10. Thomas Hasenzagl & Luis Perez, 2023. "The Micro-Aggregated Profit Share," Papers 2309.12945, arXiv.org, revised Nov 2023.
    11. Maarten de Ridder, 2022. "Market power and innovation in the intangible economy," POID Working Papers 064, Centre for Economic Performance, LSE.
    12. Daniel Berkowitz, 2020. "Declining Market Competition in China," Working Paper 6897, Department of Economics, University of Pittsburgh.
    13. Mr. Federico J Diez & Jiayue Fan & Carolina Villegas-Sánchez, 2019. "Global Declining Competition," IMF Working Papers 2019/082, International Monetary Fund.
    14. Mondolo, Jasmine, 2021. "Macroeconomic dynamics and the role of market power. The case of Italy," MPRA Paper 110172, University Library of Munich, Germany, revised 05 Oct 2021.
    15. Villegas-Sanchez, Carolina & Díez, Federico & Fan, Jiayue, 2019. "Global Declining Competition," CEPR Discussion Papers 13696, C.E.P.R. Discussion Papers.
    16. Weche John P. & Wagner Joachim, 2021. "Markups and Concentration in the Context of Digitization: Evidence from German Manufacturing Industries," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 241(5-6), pages 667-699, November.
    17. Adrián Rodríguez Valle & Esteban Fernández-Vázquez, 2023. "Estimating market power for the European manufacturing industry between 2000 and 2014," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 50(1), pages 141-172, February.
    18. Goldin, Ian & Koutroumpis, Pantelis & Lafond, François & Winkler, Julian, 2020. "Why is productivity slowing down?," MPRA Paper 99172, University Library of Munich, Germany.
    19. Jasmine Mondolo, 2021. "Macroeconomic dynamics and the role of market power. The case of Italy," DEM Working Papers 2021/17, Department of Economics and Management.
    20. Ugur, Mehmet, 2023. "Innovation, market power and the labour share: evidence from OECD industries," Greenwich Papers in Political Economy 38374, University of Greenwich, Greenwich Political Economy Research Centre.
    21. Xiaoyang Zhu, 2023. "Financial development and declining market dynamics: Another dark side of “too much finance”?," Empirical Economics, Springer, vol. 65(1), pages 275-309, July.
    22. Jan De Loecker & Jan Eeckhout & Gabriel Unger, 2020. "The Rise of Market Power and the Macroeconomic Implications [“Econometric Tools for Analyzing Market Outcomes”]," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(2), pages 561-644.

    More about this item

    Statistics

    Access and download statistics

    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:bla:acctfi:v:62:y:2022:i:5:p:4807-4830. 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: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/aaanzea.html .

    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.