The Impact of Catch-up Pressure on Overinvestment by Enterprises in the Jurisdiction of Local Governments

Abstract

During the period of economic transition, there is a phenomenon that China experiences a long period of overcapacity and excessive investment. Sustained overcapacity leads to the unbalanced industrial structure, heavy corporate debt, and low economic efficiency. The essence of excess capacity is the overinvestment behavior of micro enterprises. The existing literature has studied the phenomenon of overcapacity and overinvestment, forming two viewpoints: market failure” and government failure”. China has gradually established its own economic system in the period of economic transition. Under the system of fiscal decentralization and political centralization, the contract of China’s economic system is decomposed into local governments through layer upon layer of contracting. For economic and political reasons, competition among regions at the same level leads to the short-term behavior. Local governments have the motivation and ability to use their resources to intervene in corporate investment activities in their jurisdictions. Based on the special economic system of regional competition, this paper uses the data of listed companies to test the influence of the economic catch-up pressure faced by local governments on the overinvestment behavior of enterprises in the region. Firstly, we select China listed companies as samples during 2002-2015 years, and use three methods to measure the degree of overinvestment. Secondly, we take per capita GDP, per capita fiscal revenue as independent variables to test the impact of local economic catch-up pressure on the overinvestment of enterprises in the area. Then we use land price to measure the distorted degree of regional land resource allocation, and use the mediating effect model to examine the mediating role of distortion of factor allocation. Finally, we examine the moderating effect of the ownership structure, market competition and political connection on the impact of economic catch-up pressure on the overinvestment behavior of enterprises in the area. We find that:（1）There is a significant negative correlation between per capita GDP, per capita fiscal revenue and the overinvestment level of enterprises. There is a significant positive correlation between the ranking of GDP, fiscal revenue and the overinvestment level.（2）Economic catch-up pressure causes land price distortion. Land price distortion plays an intermediary role in the influence of economic catch-up pressure on overinvestment.（3）The balance of the ownership structure and external market competition can effectively limit the overinvestment behavior of enterprises, and the overinvestment of enterprises with political connections is even more serious. Based on China’s special economic system, this paper reveals the influence of local governments’ economic catch-up pressure on the investment behavior of enterprises in the region from the perspective of regional competition. This study provides a meaningful reference for the formation mechanism of overinvestment in micro enterprises and the resolution of macro capacity surplus.