Local Government Competition Effects On The Distribution And Capacity Of Industrial

Steel, automotive, cement, electrolytic aluminum and plate glass industry are now deeply affected by overcapacity and repeated construction, especially the steel and cement industry which are energy intensive, high emission and highly polluted business. Overcapacity made these basic industry turned their eyes to the foreign market, for instance, China’s steel exports during the first half of 2013 totaled 30.69 million tons, which rose 12.6% from the earlier year. The primary mission of basic industry is to provide product for infrastructure construction rather than to made profit from the foreign market. And these energy intensive, highly polluted industries do not match China’s vulnerable resources and environment. China’s low resources per capita, and inefficient technology bring about a lot of waste. Therefore it is essential to study China’s basic industry overcapacity and repeated construction under such circumstances.As stated in this paper, local government competition is the main reason which leaded to overcapacity and repeated construction of basic industry. The taxation decentralization reformation, which had transferred a great deal of central government’s economic administration power to local government, together with the performance evaluation system based on GDP has spurred the local government’s ambition to boost local economy. Every coin has two sides, local government competition made an obvious contribution to the construction and development of China’s market economy system, however, also leaded to some negative effect such as overcapacity and repeated construction. This paper demonstrated the inevitability of local government competition and clarified the role of investment subsidy in overcapacity with game theory. As also stated in this paper is how local government’s policy and regulations affected the industry distribution. And furthermore, this paper provided some real cases about China’s change of industry distribution and productivity to strengthen the theoretical part.Local government competition played the most important role in overcapacity and repeated construction of basic industry. When the cost of investment is assumed by the government rather the economic subject itself, the mechanism of cost-benefit will not work to the market. When the market mechanism should work to the exit of overcapacity, the local government’s subsidy prevents the exit of economic subject. Therefore, in order to solve the issue of overcapacity and repeated construction, this paper deem it is necessary to regulate local government’s behavior, transformed their functions, and handle the relationship between market and government well.