Research On Repeated Industrial Construction In A Perspective Of Firm Capability

The phenomenon of repeated industrial construction has been a difficult problem for Chinese economy. The previous researches focused on the explanation of total investment as was supposed that the marginal investment efficiency must decrease when total investment increased. However, the fact that many industries are clustered in low bottom suggests that the essence of repeated construction is firm capability convergence. In a static view, many firms are clustered in low bottom of the industry, while the supply of high bottom is inadequate. In a word, the level of firm heterogeneity is low. In a dynamic view, firms are incapable of supplying diffrenciated products, therefore size expansion and price discount becomes the main tools of competition. Investment convergence then occurs. An empirical research based on steel industry shows that firms'expansion under capability convergence leads to excessive investment.There are two reasons for firm capability convergence. The first relies on constraints mechanism, which means that firms are difficult to formulate core capability because of some internal and external factors. The main constraints come from production factors. Specialized human resource, entrepreneur, and personalized finance are inadequate. Another kind of constraint is historical. The history of Chinese firms is very short, so they have few opportunities to get capability by learning. And they are not active in learning and innovation. The last kind of constraint is related to industrial organization. The firm network is far from well developed, and intellectual property is not protected effectively, which leads to low firm capability heterogeneity. A comparative research between Chinese and American industries shows that the lagging of producer service, which supplies heterogeneous factors, makes added value ratio much lower. This is the origin of repeated construction.The second is incentive mechanism. When the local governments attract investment, they prefer "good" industry or projection. However, because of incomplete information, they are forced to decrease current subsidies to invent counterfeit. This kind of policies is unbeneficial to those good projections. It is a kind of reverse selection, similar to the "lemon" market. In a long run, it leads to incentive distortion. The companies are keen to satisfying governments'subsidies conditions and short-term operation and inactive to enter emerging industries and high-bottom projections. An empirical research based on software industry shows that the promotion policies of the government themselves lead to repeated construction.The present policies to overcome repeated construction are to restrain local governments' investment impulse. But because of incentive incompatibility, they are not very effective. In the view of firm capability, to overcome repeated construction must improve firm capabilities and increase firm heterogeneity. On one hand, constraints mechanism must be eliminated by supplying more heterogeneous factors. On the other hand, incentive mechanism must be eliminated by improving governments'skills and transferring their risks through institution innovation.