Zombie Firms and the Crowding-Out of Private Investment in China

31 Pages Posted: 23 Jun 2016

See all articles by Yuyan Tan

Yuyan Tan

Peking University, National School of Development, Students

Yiping Huang

Peking University, National School of Development

Wing Thye Woo

University of California, Davis - Department of Economics

Date Written: June 3, 2016

Abstract

From a dataset of Chinese firms in the 2005-07 period, we find that government investment boosted the performance of zombie firms and crowded out the growth of private firms; and that the higher the concentration of state banks, and of SOEs, the more conducive is the environment for nurturing zombie firms. With the exit of zombie firms, (a) the industrial output growth rate would be higher by 2.12 percentage points, (b) the capital accumulation rate by 1.4 percentage points, (c) the employment growth rate by 0.84 percentage points, and (d) the rate total factor productivity growth by 1.06 percentage point. Our results support a radical change in the way that government investment has been carried out, and support comprehensive reform of the state sector, but they do not necessarily argue against government investment in large infrastructure projects and strategically-critical areas.

Keywords: government investment, zombie firm, crowding-out, China

JEL Classification: E61, G21, L2

Suggested Citation

Tan, Yuyan and Huang, Yiping and Woo, Wing Thye, Zombie Firms and the Crowding-Out of Private Investment in China (June 3, 2016). Available at SSRN: https://ssrn.com/abstract=2798894 or http://dx.doi.org/10.2139/ssrn.2798894

Yuyan Tan

Peking University, National School of Development, Students ( email )

Beijing
China

Yiping Huang

Peking University, National School of Development ( email )

No. 38 Xueyuan Road
Haidian District
Beijing, Beijing 100871
China

Wing Thye Woo (Contact Author)

University of California, Davis - Department of Economics ( email )

One Shields Drive
Davis, CA 95616-8578
United States
530-752-3035 (Phone)
530-752-9382 (Fax)

HOME PAGE: http://www.econ.ucdavis.edu/faculty/woo/woo.html

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