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Negative investment in China: financing constraints and restructuring versus growth

  • John Knight
  • Sai Ding and Alessandra Guariglia

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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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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