How does subsidy change a firm’s market power? The case of China’s rice processing industry

Jiawu Dai,Xun Li

doi:10.1080/15140326.2020.1776976

Jiawu Dai, Xun Li

Open Access

https://doi.org/10.1080/15140326.2020.1776976

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Abstract

ABSTRACT The effect of subsidy on firms’ market power is controversial and unclear. In this article, we investigate such effect through an unbalanced panel data at firm level. Empirical results indicate that subsidy weakens the market power of firms subsidized. We then verify our hypothesis for this result that striving for subsidy through building or keeping relationship with governments will lead to higher administration and selling expense, and therefore lower market power, given that the rice processing industry is relatively competitive due to its low entry barrier and high homogenous product. Compared with non-state-owned enterprises, state-owned enterprises are found to be weaker in market power, to be higher in administration expense and to be lower in selling expense, which are well consistent with China’s reality. Finally, robustness test consolidates our conclusions.

Highlights

Social stability and economic growth are generally the two main goals for transition economies
The National Office of Comprehensive Development of Agriculture (NOCDA), a specialized agency established under the Ministry of Finance (MOF) of China, undertakes the work of authorizing subsidy policies related to agribusiness
If 0 < MCi2t < 1, it implies that the cost of an additional unit of subsidy is less than the increased revenue from the subsidy, and market power will be less than the case without subsidy

Summary

Introduction

Comprehensive Development and Industrialized Operation of Agriculture in 2009 (No 2008–208 Document of NOCDA) explicitly stipulates the detailed plan of subsidy on agribusiness, including the principles, subsidizing range and targets, application require ments and other items. It is common that many enterprises in China strive to acquire more subsidy through building and managing relationship with government. It spends a lot of resources which would be used to improve enterprises’ performance. Yu, Hui, and Pan (2010) proved this point that fiscal subsidy on China’s private enterprises connected to local governments will generate a negative effect on their performance. From another perspective, Liang, Li, and Lv (2012) found that subsidy policy in under-developed regions tends to attract firms with low efficiency to enter the local markets.

Methodology and data

Empirical results

Robustness check

Conclusions

Findings

Notes on contributors