Product Market Competition, Capital Inefficiency and Total Factor Productivity

The enhancement of total factor productivity serves as a crucial pillar and driving force for economic growth. We develop a general equilibrium model for product markets to investigate the impact of product market competition on TFP dynamics. Drawing on empirical evidence from Chinese listed companies spanning 2007 to 2023, our analysis reveals that diminished product market competition significantly constrains the enhancement of corporate TFP. The mechanism analysis demonstrates that weakened product market competition exacerbates capital inefficiency within enterprises, thereby leading to depressed TFP. Furthermore, we examine the heterogeneous effects of product market competition on TFP from the perspectives of enterprise ownership and factor intensity. Our findings indicate that, compared to non-state-owned enterprises, the weakening of product market competition induces a more pronounced decline in TFP for state-owned enterprises. Additionally, relative to capital-intensive enterprises, the weakening of product market competition exerts stronger negative effects on labor-intensive enterprises’ TFP, whereas demonstrating substantial positive impacts on technology-intensive enterprises’ TFP. Our comprehensive investigation not only enriches the theoretical framework pertaining to the relationship between product market competition and TFP but also addresses practical needs for economic development, holding significant implications for addressing current economic development constraints.