SOEs reform and capital efficiency in China: A structural analysis

Abstract

This paper investigates the effect of state-owned enterprises reform, a policy phrased as “grasping the large, letting the small go”, on firms’ capital efficiency in Chinese industries from 1998–2007. First, we present several stylized facts on investment rates in state and private firms. Second, a dynamic programming problem is proposed and key structural parameters are recovered through simulated moment matching method, so the estimated dynamic model is able to replicate the stylized facts that are directly observable from the firm-level data. Our quantitative analysis shows that the conversion of state firms into private ones reduces capital adjustment costs. Particularly, state firms’ quadratic adjustment cost declines significantly almost by half, and the fixed cost decreases slightly. These findings are robust in various specifications. Hence, the reform in state firms leads to increased capital efficiency. Last, the counterfactual analysis suggests that state and private firm’s output would increase about 9.60% and 1.87% if the capital adjustment costs in state firms were lowered to the same levels in private firms.