Working Paper: NBER ID: w13103
Authors: David Dollar; Shangjin Wei
Abstract: Based on a survey that we designed and that covers a stratified random sample of 12,400 firms in 120 cities in China with firm-level accounting information for 2002-2004, this paper examines the presence of systematic distortions in capital allocation that result in uneven marginal returns to capital across firm ownership, regions, and sectors. It provides a systematic comparison of investment efficiency among wholly and partially state-owned, wholly and partially foreign-owned, and domestic privately owned firms, conditioning on their sector, location, and size characteristics. It finds that even after a quarter-of-century of reforms, state-owned firms still have significantly lower returns to capital, on average, than domestic private or foreign-owned firms. Similarly, certain regions and sectors have consistently lower returns to capital than other regions and sectors. By our calculation, if China succeeds in allocating its capital more efficiently, it could reduce its capital stock by 8 percent without sacrificing its economic growth (and hence could raise its household consumption and deliver a faster improvement to its citizens' living standard).
Keywords: capital allocation; investment efficiency; China; state-owned firms; private firms
JEL Codes: E22; F21; O1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| efficient capital reallocation (D61) | reduce capital stock by 8% (E22) |
| efficient capital reallocation (D61) | increase household consumption (D10) |
| efficient capital reallocation (D61) | improve living standards (I31) |
| state-owned firms (L32) | lower returns to capital (D33) |
| domestic private firms (P31) | higher returns to capital (D29) |
| foreign-owned firms (F23) | higher returns to capital (D29) |
| capital allocation system biases (G31) | inefficiencies in capital returns (G31) |