Exit Barriers,Resource Misallocation And Aggregate Total Factor Productivity

The real growth rate of China economy keeps 10% for about 30 years since the1978 economic reform.However,the real growth rate keeps going down gradually after the year 2010.China economy went into the “new norm” with the problem of overcapacity and zombie firms.Researches show that the decrease of the contribution of Total Factor Productivity(TFP)to the economic growth is the mean reason why the economic growth rate slow down after 2010.Many researches find that TFP plays a key role in explaining the difference of economic growth across countries.Traditionally,the reserch on the cross-country difference of TFP focus on the the reason why firms in one country have low TFP than firms in other countries.However,recent reserches emphasize the role of misallocation in explaining the cross-country difference of TFP.Literature on misallocation do not try to explain why firms in one country have low TFP than firms in other countries,they instead focus on the resource alloction across firms with different TFP.If resource can not go to the high TFP firms,then there will be TFP losses in the economy.Exit barriers are observed in nearly all countries around world,including both development countries and developed countries.As the part of the Creative Destruction,firm entry and exit play a key role in explaining the TFP differences.If there are exit barriers in the economy,then low efficiency firms cannot exit the market,so the resources cannot reallocate to the high efficiency firms.This will lead to the misallocation and finally decrease the aggregate TFP.Exit barriers also exist in China.In China,local officials have incentive to increase employment and local fiscal revenue by giving subsidies to zombie firms,which will increase the chance to be promoted.Besides,local government competition will also lead to local protectionism.Motived by the long-standing problems of zombie firsm and overcapacity under the “new normal”,this paper focus on the “Exit Barriers” and try to explain how exit barriers influence the resource allocation.Exit barriers will lead to the accumulation of of low-efficiency firms in the long run,which will not only cause resource misallocation among incumbent firms,but also hinder the entry of new firms,therefore reducing the aggregate TFP.The article is divided into six chapters.The first chapter is the introduction of this paper,which shows the research background,research significance,research ideas and research methods of this paper.The second chapter is literature review.This chapter systematically investigate the domestic and foreign literature on misallocation and TFP,exit barriers and zombie firms.On this basis,it helps to find out the shortcomings of existing researches and points out the direction for this research.Chapter 3 discusses the long-run impact of exit barriers on resource misallocation and aggregate TFP.This chapter build a dynamic general equilibrium model with heterogeneous firms and endogeneous firm entry and exit,and introduces different forms of exit barriers into the model.This paper uses the Chinese industrial enterprise database to calculate the TFP at the firm level,and uses it to calibrate the model.The results show that if the exit barriers are removed,the aggregate TFP will increase by 9.29%.This increase in aggregate TFP comes not only from the reallocation of resources among incumbent firms,but also from the increase in the entry of new firms.The fourth chapter focuses on the impact of exit barriers of state-owned enterprises(SOEs).This chapter expands the dynamic general equilibrium model in chapter 3 by including SOEs and private enterprises(PEs).In the model,the technologies of the two types of fims are heterogeneous,but only PEs can entry and exit freely.The entry of SOEs is determined exogenously by government.Exit barriers and subsidies for SOEs are introduced to the model to examine their impact on the private sector and the overall economy.Quantitative results show that the exit barriers of the SOEs alone do have a substantial impact on the macro level.However,the distortion of private sector caused by the exit barriers of the SOEs is also equally important to the aggregate TFP.The fifth chapter considers two important factors in the economy.They are the financial constraints of the private sector and the productive investment of the government,respectively.In the year 2008,China government adopt the stimulus package that contains government investment of 4 trillion yuan.Local governments greatly increased the investment by borrowing from banks,and most of these investments were going into SOEs,while the expand of PEs were limited because fo thefinancial constraints.These problems eventually led to the problems of zombie firms and overcapacity of SOEs after year 2013.Therefore,this chapter examines the financial constraints of PEs and the productive investment of the government,and investigate the interactive effects of these factors with the exit barriers.The sixth chapter is the conclusion of the article.This chapter summarizes the conclusions of the research,and gives policy recommendations based on these conclusions.Moreover,the directions for further research in the future are also proposed in this chapter.The main conclusions of this paper are as follows:First,exit barriers can explain the decline of aggregate TFP,the increase of capital-output ratio,the decline of firm entry and exit rate and the decline of the growth rate of firm profit under the “new normal”.Exit barriers cause low-efficiency firms to survive in the market for a long time,distort the allocation of resources,and lead to the reduction of TFP.These low-efficiency firms use relatively higher capital,but only produce relative lower output,so the capital-output ratio rises.At the same time,low-efficiency firms do not exit,which makes it more difficult for new firms to enter,thus reducing the firm entry and exit rate.The existence of a large number of low-efficiency firms will lead to a decline in the overall industry profit.Therefore,eliminating exit barriers is important to improve the overall efficiency of the economy and can promote higher-quality economic development.Second,the exit barriers of SOEs have substantial effect on aggregate TFP,and the distortion to PEs that caused by the exit barriers of SOEs is also equally important to the decline in TFP.The free entry conditions of PEs can alleviate the impact of exit barriers.The reason is,under the condition of free entry and exit of PEs,the impact of exit barriers of SOEs on the price(wage)level will be offseted by the free entry and exit of PEs.If the exit barriers of SOEs do have a distorting effect on PEs,it will lead to a greater loss of aggregate TFP.Quantitative results show that the distortion of PEs is equally important.Third,the financial constraints of PEs will have substaintial impact on the overall economic efficiency,and the relaxation of financial constraints can improve the efficiency of the overall economy.In the case of exit barrier,reducing the financial constraints of PEs will increase the output of PEs less than the case that without exit barriers.Similarly,in the case of the exit barriers,reducing the financial constraints of PEs can increase the TFP faster,but the amount of increase is very limited.This means that simply relaxing the financial constraints of PEs cannot reduce the efficiency loss caused by the exit barriers of SOEs.The contributions of this paper are as follows:First of all,most of the theoretical research on firm dynamic and TFP focused on the entry cost rather than the exit barriers.Most of the research on China’s exit barriers and zombie firms are empirical research,which mainly discussing the formation and distribution of zombie firms and their negative impact on non-zombie firms.Few studies have looked at whether exit barriers have a large enough impact on TFP at the macro level,and whether exit barriers can explain the economic phenomena observed under the new normal.This paper makes a small step into this area,exploring how exit barriers lead to the accumulation of inefficient firms and the reduction of new entrants,and ultimately affect the aggregate TFP.Secondly,although the existing literature has found that there is substantial misallocation in China,most studies have not been able to show whether misallocation can explain the decline in TFP under the new normal due to lack of data and other factors.Although the economy has entered the new normal due to the influence of many other factors,this paper uses the dynamic general equilibrium model to study the problem of resource misallocation caused by exit barriers on the TFP.The theoretical mechanism and quantitative results are obtained to illustrate the extent to which exit barriers can explain the decline of TFP,the increase of capital-output ratio,the decline of firm entry rate and the decline of firm profit growth rate under the new normal.Finally,this paper not only analyzes the influence of the exit barrier itself,but also considers the combined effects of the exit barrier with the financial constraints of PEs,and government productive investment.The real world is often influenced by various factors.Only focus on a single policy may not be able to describe the impact of this policy well enough.This paper discusses the interactive effects of financial constraints of PEs and government productive investment with exit barriers,which help to understand the economy.