What effect does the size of the state-owned sector have on regional growth in China?

Abstract

This paper examines the effects state-owned enterprises (SOEs) have on China's economic growth. We present a simple and intuitive model of the political process, which predicts a larger state-owned sector will lead to lower growth rates. We then estimate regressions with various measures of and proxies for real output growth using a variety of other factors, including measures of the size of the state-owned sector, as regressors. We find a robust negative relation between the size of state-owned enterprises and the provincial growth rate. The estimates indicate that a decrease in the SOE share of industrial production by 10 percentage points increases real GDP growth the following year by between 0.7% and 1.2%. The average impact of a reduction in the SOE share in employment by 10 percentage points is between 1.6% and 2.3%.