The Influence Of Capital Misallocation On Total Factor Productivity

Since the reform and opening-up,China has achieved an average annual GDP growth rate of 9.4 percent,making it the world’s second largest economy and creating the "Chinese miracle".At the same time,China’ economic development is faced with the challenge of “Middle-Income Trap”,the arrival of the “Lewis Turning Point” suggesting that China’s economy gradually transforms from dual economy phase to the new classical economic growth phase,and economic development enters into the key transformation period of “scale support →efficiency support →TFP support”.The report of the 19 th CPC National Congress pointed out that China’s economy has shifted from a stage of high-speed growth to a stage of high-quality development.We need to promote change in the quality,efficiency and driving force of economic development,and raise TFP.The original scale expansion and factor-driven development mode needs to shift to efficiency improvement and innovation-driven development,and the growth momentum of economic growth will increasingly rely on the growth of TFP.How to achieve the improvement of TFP and foster new drivers of economic growth has become an important academic topic and policy key points.Since the investment-led economic growth mode has the feature of diminishing marginal output,optimizing the optimal allocation of capital among enterprises,industries and regions will play a more positive role than continuing to expand the scale of capital input.The theoretical logic of this paper is that,on the one hand,the efficiency improvement brought by optimized capital allocation is not premised on increasing capital factor input.Reallocating factors of production such as capital from low productivity firms to high productivity firms could reduce the “crowding out effect”.On the other hand,optimizing the allocation of capital factor can promote investment in productive activities such as R&D and innovation,stimulate market players to participate in market competition based on the level of productivity,and thus promote the continuous improvement of TFP of micro firms and macro economy,and finally realize the high-quality economic development.This paper,with the title of “The influence of capital misallocation on total factor productivity”,mainly studies the problems existing in the allocation of capital factor under the background of high-quality economic development,the influence of capital factor on enterprises,industries and regional TFP and its impact mechanism.First of all,by building multisectoral general equilibrium model,we analyze the influence of capital misallocation on TFP from the enterprise level,industry level and regional level respectively.At the enterprise level,capital misallocation may distort the micro enterprise production and management behaviors,lead to reduce R&D innovation investment,increase the cost of financing and the induced non-productive activities such as rent-seeking,which is not conducive to the improvement of the micro business productivity.At the industry level,capital misallocation leads to the low-end locked technology level,distorts the market structure and investment structure of the industry.At the regional level,capital misallocation reduces regional R&D and innovation vitalities,hinders industrial structure upgrading and distorts regional investment structure,resulting in TFP losses.Secondly,to test the theoretical judgments,this paper uses the data of Chinese listed companies,China’s industrial enterprise data and city level panel data to calculate the degree of capital misallocation and TFP at enterprise level,industry level and regional level,and on this basis,we empirically test the effects of capital misallocation on TFP and its mechanisms.Thirdly,considering that China is constantly enriching the supply of policies in the process of gradual reform,such as industrial policy,financial reform policy and other policies,this paper investigates the impacts of these policy measures on capital misallocation and TFP,so as to provide experience for optimizing policies.Finally,on the basis of theoretical analysis and empirical research conclusions,this paper gives policy recommendations.The main research conclusions are as follows:1.There is obvious capital misallocation among enterprises,industries and regions.As the market-oriented reform of factor market lags behind the market-oriented reform of product market for a long time,there are many explicit and implicit obstacles to the free flow of capital factor.There are significant differences in the price of capital factor among different market entities,which leads to the distortion of capital price.However,with the advance of factor marketization reform,the degree of capital misallocation in the sample period gradually decreases,indicating that the level of market-oriented allocation of capital factor is gradually improving.2.At the enterprise level,capital misallocation causes micro TFP loss.Based on the database of Chinese listed companies from 2007 to 2019,this paper measures the degree of capital misallocation at the enterprise level,and further empirically tests the impacts of capital misallocation on TFP of enterprises.The results show that :(1)Capital misallocation is an important cause of TFP loss at the enterprise level,and the estimation results obtained by different TFP measurement methods are relatively robust.(2)Based on industry characteristics,corporate ownership and size heterogeneity analysis showed that the negative impact of capital misallocation on TFP in non-manufacturing industries is more significant,state-owned enterprises and large enterprises compared to the non-state enterprises and small businesses are more affected by the misallocation of capital.(3)Considering the endogenous problem caused by the reverse causality between capital misallocation and enterprise TFP,this paper uses the one-period delayed capital misallocation and the average capital misallocation degree of other enterprises in the industry as instrumental variables to conduct empirical tests,and the results are still robust.(4)The analysis of influence mechanism shows that enterprise R&D and innovation activities,financial subsidies and financing constraints are the important channels of capital misallocation affecting enterprise TFP.Enterprise R&D and innovation investment can alleviate the TFP loss caused by capital misallocation,while fiscal subsidies and financing constraints will aggravate the negative impacts of capital misallocation on enterprise TFP.3.At the industry level,capital misallocation causes the loss of TFP of the industry.This paper uses the China industrial enterprises database,built a panel data set contains 347 fourdigit industries.This paper empirically studies the influence of capital misallocation on TFP of industries and its mechanism,and further investigates whether the competitiveness of industrial policies in the sample period can help to improve the allocation efficiency of capital and promote the increase of TFP of industries.The results show that :(1)Capital misallocation has a significant negative impact on the TFP of the industry.Each increase in the degree of capital misallocation of the industry will lead to the decline of the industry TFP between 14.1% and24.7%.Based on the mean value of industry capital misallocation,an increase of one standard deviation in the degree of industry capital misallocation results in a decrease of 2.6% to 4.5%in industry TFP.(2)The mechanism of industrial capital misallocation on TFP is mainly reflected in three aspects: increasing the financing cost of the industry,reducing the R&D and innovation activities of the industry,unfavorable for efficient enterprises to enter the market and inefficient enterprises to exit the market.(3)Industrial policy affects the allocation of industrial capital and the change of productivity.In particular,the improvement of competitiveness of industrial policy helps to alleviate the degree of industrial capital misallocation and promote the increase of industrial TFP.4.At the regional level,capital misallocation causes regional TFP losses.Deepening regional financial reform can alleviate regional capital price distortion and promote regional TFP increase.This paper,by using 2004-2017 data of 285 Chinese cities as the research samples,empirically studies the influences of capital misallocation on regional TFP and its mechanism,and on this basis,further investigates whether regional financial reform helps to improve the efficiency of capital and promote the industry TFP.The results show that :(1)Capital misallocation has a significant negative impact on regional TFP.Under the condition of constant returns to scale,the increase of capital misallocation by 1 unit will reduce the growth rate of TFP by 1.615 percentage points,the technical efficiency by 0.725 percentage points,and the technological progress level by 0.899 percentage points.Under the condition of variable return to scale,the increase of capital misallocation degree by 1 unit will result in the decrease of TFP growth rate by 2.4 percentage points,the decrease of technical efficiency by 0.856 percentage points,and the decrease of technological progress level by 1.435 percentage points.Capital misallocation has a greater impact on regional technological progress index.(2)The mechanism of regional capital misallocation on TFP is mainly manifested in three aspects: hindering regional R&D and innovation activities,restricting the upgrading of industrial structure,and distorting regional asset investment structure.(3)Considering the differences in the development degree of regional financial markets,this paper adopts the quasi-natural experiment method to estimate the effect of regional financial reform on alleviating capital misallocation and improving regional TFP.The research shows that the regional financial reform has a positive policy effect,which helps to alleviate capital misallocation and promote regional TFP growth.Promoting the optimal allocation of capital and improving TFP is not only an inherent requirement for high-quality economic development,but also an important starting point for building a “dual circulation” development pattern.Based on the research conclusions of this paper,corresponding policy suggestions can be provided.Firstly,at the institutional level,we should promote the market-oriented reform of factors and improve the pricing mechanism of capital factor.Secondly,at the regional level,we should deepen regional financial reform and create a favorable business environment.Thirdly,at the industry level,we should optimize the industrial investment structure and build a competitive neutral policy system.Fourthly,at the enterprise level,we should promote the clearing out of market entities and encourage enterprises to innovate in science and technology.From top-level institutional design to specific policy arrangements,we should properly handle the relationship between the government and the market in resource allocation,so as to promote the circulation of capital,and Leverage the role of capital in supporting scientific and technological innovation to help China achieve highquality economic development.The innovations of this paper lies in :(1)The influences of capital misallocation between firms,industries and regions on TFP were considered comprehensively.This paper adopts a variety of measurement methods to reflect the performance of capital misallocation among enterprises,industries and regions,and estimates the TFP loss caused by capital misallocation,which is helpful to understand the impacts of different levels of capital misallocation on TFP.(2)The mechanisms of capital misallocation affecting TFP is deeply analyzed.The earlier literature usually assumed a priori that distortions and firm size or productivity satisfies a joint distribution,but the mechanism by which capital misallocation affects TFP remains a "black box".This paper analyzes the impacts of capital misallocation on TFP by constructing a multisector general equilibrium model,and tests the mechanisms of capital misallocation on TFP from the enterprise level,industry level and regional level respectively,which is helpful to enrich relevant theories and empirical studies.(3)This paper examines the impacts of competitive industrial policies and regional financial reform policies on capital misallocation and TFP in the process of gradual reform in China.Existing studies pay more attention to the causes and effects of capital misallocation,but the study on policy effects is still not deep enough.This paper uses econometric model to investigate the effects of competitive industrial policies and regional financial reform policies on capital misallocation and TFP.It also discusses the relevant policy suggestions to optimize the allocation of capital and promote the improvement of TFP.