The Research On The Relationship Between Industrial Performance And Local Government As An Element Of Institution

The effects of institution to the economic development have caught more and more attention of the economists, consequently, leading the institution factors in the research of industry could meet the demand of modern economics, The local governments which were a major social power in the process of the China's reform and open have made a significant contribution to the economic increasing of China, however, they have got inescapable responsibility to the imbalance of local economics and the irrational industrial structures. With the consistent evolution of economic researching method, the academe's researches on institutional arrangement behind the local governments'actions are deeper, simultaneity, the discussions of the local governments'effects on the performances of local industries are increasing, these researches and discussions provide theoretical bases for analyzing the relationship between industrial performance and local government which is regarded as an institutional factor. Local governments are the agents of the central government who want to develop the local industries and the executors of superior policies, also they are the framers of some local market rules and the participants of local market in some aspects. This multiple identity makes the local governments'decisions show an obvious institutional character. The institutional factors such as fiscal decentralization, administrative systems and the developmental level of market decide the local governments' incentives and constraints together. Local governments make these factors act on the local industrial performance by their self-interest actions. Hence, as far as we crack the secret of local governments' decisions, we can show the causes of many irrational problems in China such as repeated construction, similar industrial structures in different regions, over output, the imbalance arrangement of resources between industries and the irrational distribution of firm's scale.This paper puts the factors of institutional arrangement into the frame of the local governments'incentives and constraints, discuss the effects of local governments'actions on the industrial performance in both macroscopic and microcosmic aspects with mathematical models. The first part of this paper is the introduction, it introduces the background and the significance of this research. The second part sums up relevant researches in theoretical and empirical aspects, then brings forward the basic logic of this research. The third part examines why local governments'input is biased by establishing a model which includes soft budget constraint. The fourth part analyses the reason of the imbalance input of local governments between industries by a dynamic game model, and research the factors which restrict local governments'decisions. The fifth part summarizes the paper's conclusions and propounds some advices of the author.The main conclusion is that institutional arrangements such as fiscal decentralization and the administrative systems are the primary causes of the governments'interferences to the industries. The local governments'fiscal share and power of economics and politics and the central government's assessment methods of local governments'performance decide the local governments'object functions and budget constraints. According to the principle of maximizing own benefits, local governments set a target of maximizing political achievements other than maximizing social benefits. In macroscopic view, local governments pursue the industries which can bring more outputs and higher employment rates, excessively support the local dominant industries, enlarge the industries'scale, intent on productive expenditures and ignore the servicing and supporting expenditures. In microcosmic view, local governments intend to support the associated firms which can follow their will on resource allocation and merges, these actions restrain the development of unassociated firms objectively, then lead to the imbalance of industries'structure and make the industrial performance worse. Simultaneity, the models in this paper also imply that the perfection of market institution, administrative restructuring and enhancing the public's power can restrict local governments biased actions to some extent.The first innovative point of this paper is that the author tried to bring the institutional factors into the analysis of industrial performance in general. Currently the academia has noticed the effects on industry from institution, and people have done some theoretical discussions and tests of data in different aspects. This paper abstracts the relationship between institution and industry from the specific analyses, and quests the inherent relation between institution and industrial performance. The other innovative point of this paper is that we treat the local government as a direct institutional factor, and make it as the joint between institution and industry. In this way we can embody the local government's multiple identity of being agent of central government, vindicator of local orders and participant of market, then understand the deeper reason why local governments interference economics. Also, there are two main deficiencies in this paper. First the models in this paper reflect more institutional arrangements of fiscal and administrative power allocation between local and central government, but these discussions lack other institutional factors such as openness of market, the perfection of local laws and rules and the public's power. So the summary of institutions which affect the industrial performance is not complete. Besides, the paper's main researching method is establishing mathematic model, these conclusions of the models lack the supports of direct empirical data. These should be completed in the further research.