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Firm Dynamics and SOE Transformation During China’s Economic Reform

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  • Shijun Gu
  • Chengcheng Jia

Abstract

We study the reform of China’s state-owned enterprises (SOE) with a focus on the corporatization of SOEs. We first document the empirical patterns of the "grasp the large and let go of the small" policy. To quantify the implications of the reform for aggregate output and TFP, we build a three-sector firm dynamics model featuring financial frictions and endogenous firm-type choices. Our calibrated model shows that the SOE reform can increase long-run TFP by encouraging the exit of the least efficient firms in the state sector, but the magnitude of TFP growth also depends on the efficiency in capital reallocation. In the short run, corporatization increases aggregate output and TFP because it allows the most productive SOEs to have a higher borrowing capacity than they would under privatization.

Suggested Citation

  • Shijun Gu & Chengcheng Jia, 2021. "Firm Dynamics and SOE Transformation During China’s Economic Reform," Working Papers 21-24R, Federal Reserve Bank of Cleveland, revised 18 Apr 2022.
    • Handle: RePEc:fip:fedcwq:93174
    DOI: 10.26509/frbc-wp-202124r
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    More about this item

    Keywords

    firm dynamics; economic reform; Chinese economy;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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