Local Government Behavior And Enterprises’ Production Performance

Using the 1999-2007 Chinese Manufacturing Enterprises Database, this paper, for the first time, investigated the impact of local governments’competition on micro-level enterprises’performance, and discussed the regional disparities and underlying mechanisms of these impacts. Based on the consideration that Chinese local governments have great impulse to guide the real economy, we believe that local government behavior should be introduced to the line of enterprises’productivity research, and at the same time, in the investigation of local government behavior, we should also pay attention to the dynamics of micro-level enterprises. Therefore, this paper firstly computed the total factor productivity of each enterprise in the database using the semi-parameter methods called OP and LP; After that, we collected data from prefecture-level cities, to proxy the local government behavior, which includes tax preference, industrial land of low price, and government investment. At last, we construct a matched sample which integrates TFP of micro-level enterprises and indexes of macro-level local government behavior. We use fixed effects model and random effects model respectively to estimate the unbalanced panel data, and also use a lot of methods to make sure the robustness of the basic results. Our research confirms the positive impacts of local governments’competition on local economy, especially the productivity of micro-level plants:in Chinese middle area, where the industrial economy is relatively underdeveloped, local governments’competition could significantly boost the performance of local enterprises. However, in southeast China, where the industrial economy is relatively developed, these impacts are trivial.This paper makes marginal contributions to both productivity literatures and local government behavior literatures:1) This paper, for the first time, builds connections between local government behavior and micro-level enterprises’ productivity, and finds empirical evidence for the positive impacts of local governments’competition on productivity; 2) Our empirical evidence shows that, using different methods, local government could boost the productivity of local plants by 1% to 5%, but there also exists significant regional disparity; 3) More importantly, compared to traditional literatures which consider that local governments’efforts could promote local economy "in quantity", this paper proves that they could also influence local economy "in quality"; 4) Obviously, the conclusions of this paper could help us understand the dialectical relationship between "visible hands" and "invisible hands", and at the same time, could also be meaningful to the formulation of regional development policies.Considering the policy implications, we believe that, for the huge disparity among different regions in China, our economic policy should be based on different situations. During the primary stage of industrialization, the support and guidance of local government are helpful, to not only the scale expansion but also the increase of performance of micro-level plants. However, in the maturity stage of industrialization, the influence of government would become insignificant or even negative. Therefore, at this time, we should turn back the deterministic power for resource allocation to the market.