Zombie Firms and the Crowding-Out of Private Investment in China
31 Pages Posted: 23 Jun 2016
Date Written: June 3, 2016
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
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