Trial And Error: Differentiation Of Chinese Manufacturing Enterprises' Entry And Exit

In this paper we examine the technical efficiency dynamics of Chinese manufacturing firms. We focus on how firms’ entry and exit into the industry could affect the distribution of the technical efficiency of the industry. Applying the stochastic frontier analysis (SFA) method, we evaluate the total factor productivity (TFP) change and at the same time get the technical efficiency distribution of each2-digital industries. We found a technical efficiency polarization trend in Chinese manufacturing sectors, means while the level of average technical efficiency of Chinese firms is much lower than their counterparts in other economic entities like Taiwan, the gap between the average and top ones are getting larger and larger. We use Dynamic OP method to separate the effect of entry, exit and incumbents, and we found those who stay in the industry is the main reason of this deteriorating trend. While the new entrants’technical efficiency is slightly lower than the average, the exit of less performed ones is the main positive component in this dynamic. A big portion of low-efficiency firms exit from the industry after the China’s entry into the WTO, indicating that the exit is trigged at certain time point. On the other hand we evaluate the entry effect on the incumbents using Aghion’s step-by-step innovation model. We verified the incentive effect of advanced entrants’ threat on the incumbents. With a10%increase of new entrants’value added share, the TFP of incumbents will receive a0.5%improvement. We verify that this incentive only come from the advance ones of the new entrants.