Government procurement as a catalyst: Reshaping firm entry-exit dynamics in China

Government procurement is a key demand-side policy tool for state intervention in the economy, as it not only directly influences micro-corporate decision making but also shapes regional industry dynamics. Nevertheless, its industry-level impacts remain underexplored. This study adopts the perspective of firm entry and exits to investigate how government procurement shapes regional industry dynamics. We find that government procurement significantly increases the entry of new firms in regional industries while also promoting firm exit. A series of robustness tests and IV-based causal identification demonstrate the reliability of the result. Mechanism analysis reveals that, on the one hand, by raising the proportion of contracts awarded to local firms, government procurement sends a policy signal of supporting local industry, thereby encouraging both entry and exit. On the other hand, by prefer small and medium-sized enterprises (SME), it enhances market competition and stimulates firm entry and exit. Further analysis shows that: first, government procurement also generates supply-chain spillover effects, extending its influence to upstream and downstream industries; second, the distribution of procurement contracts among firms within an industry moderates the impact of procurement; third, the impact of government procurement on the entry and exit of enterprises ultimately enhances the industry's innovation capability; and finally, the effect of government procurement on firm entry and exit is stronger in regions with a better business environment. This study provides policy insights for optimizing government procurement policies to promote regional industrial development.