Firms Quasi‐dynamics in Chinese Manufacturing Industry

• Published date: 01 September 2022
• Author: Lixing Li,Qihong Liu,Changyu Ren
• Date: 01 September 2022
• DOI: http://doi.org/10.1111/cwe.12439

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 102–127, Vol. 30, No. 5, 2022

102

*Lixing Li (corresponding author), Professor, China Center for Economic Research, National School of

Development, Peking University, China. Email: lilixing@nsd.pku.edu.cn; Qihong Liu, Professor, Department

of Economics, University of Oklahoma, USA. Email: qliu@ou.edu; Changyu Ren, PhD Candidate, National

School of Development, Peking University, China. Email: rency@pku.edu.cn. The authors are listed in

alphabetical order with equal contributions. We would like to thank Yong Chao, Junji Xiao, Zuo Yu, Ting

Zhu, and seminar and conference participants at Dongbei University of Finance and Economics and Chinese

Economists Society Annual Conference (in 2017 and 2021) for helpful comments and suggestions. Lixing

Li acknowledges fi nancial support from the National Natural Science Foundation of China (No. 71773004).

Qihong Liu thanks the visiting scholars program of the China Center for Economic Research, National School

of Development, Peking University.

Firms Quasi-dynamics in Chinese

Manufacturing Industry

Lixing Li, Qihong Liu, Changyu Ren*

Abstract

We explore firm quasi-dynamics (entry, exit, and growth) in Chinese manufacturing

industry and investigate how these dynamics vary across regions. Our results show that

relative to provinces with less developed economies, in provinces with more developed

economies (i) there is a higher proportion of new fi rms; (ii) new fi rms are smaller and

more labor-intensive; (iii) fi rms exit at a quicker rate, and surviving fi rms grow faster.

These results point toward cross-region diff erences in market effi ciency in terms of how

much it costs a fi rm to enter or exit the market. Our fi ndings shed light on how fi rms

should adapt their strategies across regions and how the government should create

sound policies on industrial upgrading and relocation.

Keywords: entry and exit, fi rm dynamics, industrial shift, labor cost, market thickness

JEL codes: D24, L25, O14

I. Introduction

After decades of economic reform, Chinese manufacturing industry has experienced

remarkable growth and has reached a stage that calls for dramatic industrial upgrading

and relocation due to rising labor costs. An extensive body of literature has been devoted

to analyzing Chinese manufacturing industry (Brandt et al., 2012). Most existing studies

focus on established firms, and this has been facilitated by the availability of high-

quality data such as the Annual Survey of Industrial Firms (ASIF), which only includes

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Firms Quasi-dynamics in China 103

above-scale industrial fi rms. In contrast, data on small Chinese fi rms are scarce, and as a

result, small fi rms are rarely the subject of academic research.

We aim to fi ll the gap in this paper and shed light on small Chinese fi rms and their

behaviors. Using two waves of Chinese economic census data (in 2004 and 2008), we

explore fi rm quasi-dynamics (entry, exit and growth) in Chinese manufacturing industry

and investigate how these dynamics vary across regions. We characterize regions

(provinces) by their migration status, which closely mimics the level of their economic

development. Provinces with more developed economies, in general, attract workers

and immigrants from other provinces. If a province has a higher ratio of net immigrants,

then we say the province has a more developed economy. We are particularly interested

in a cross-regional comparison of the numbers and characteristics of new fi rms and their

“exit” and “growth” patterns over time.

We start by analyzing fi rm entry (new fi rms). Our results show that provinces with

more developed economies see greater numbers of new firms, which are also smaller

and more labor-intensive relative to their counterparts in less developed. It is rather

counterintuitive that new fi rms are more labor-intensive in regions with more developed

economies. After all, labor is more expensive and capital is cheaper (taking into account

both the supply and demand sides in the factors market) in more developed provinces.

Thus one would expect new fi rms there to be less labor intensive.

Next, we proceed to analyze fi rm exit and growth. We fi nd that in provinces with

more developed economies, firms exit at a quicker rate, and surviving firms grow

faster (using several measures of fi rm size). As supporting evidence, we also conduct

a cross-sectional comparison on fi rms by comparing the 2004 and 2008 data, and by

examining the time-series change in fi rms’ capital intensity. We fi nd that while fi rms

generally became more capital intensive from 2004 to 2008, the capital intensity of

fi rms has decreased in more developed provinces relative to fi rms in less developed

regions.

These results seem to point to cross-region differences in market efficiency in

terms of how much it costs a firm to enter or exit the market. That is, entry and exit

costs are lower in provinces with more developed economies.1 With lower entry costs,

more developed provinces would see greater numbers of new firms, which are also

smaller. Smaller fi rms tend to be more labor intensive, which off sets the cross-regional

diff erences in factor prices, leading to the fi nding that new fi rms are more labor-intensive

in more developed provinces. Similarly, lower exit costs mean that a nonperforming

1Entry costs can go beyond monetary costs to include nonmonetary costs such as mental costs (e.g., risk

taking), which allows entrepreneurship to play an important role in the economy.