Domestic Private Firms Research Articles

Pilot Free Trade Zone Establishment and New Firm Entry: Evidence from China

ABSTRACTThis article investigates the effect of pilot free trade zones (FTZs) on new firm entry. Using firm registration data in China from 2003 to 2020, we find that the establishment of FTZs has a significant and persistent positive impact on new firm entry, and it is attributed to the capital and talent agglomeration induced by FTZs. Heterogeneous analyses show that FTZs primarily stimulate the entry of firms in high‐tech industries and domestic private firms, and the effect of FTZs is more pronounced in prefectures with higher institutional innovation and those in coastal areas. Moreover, FTZs exhibit positive spillover effects on the emergence of new firms in surrounding regions, suggesting that the establishment of FTZs has empowered coordinated regional development.

The Effect of Export Market Access on Labor Market Power: Firm-level Evidence from Vietnam

We examine the impact of an export market expansion created by the US-Vietnam Bilateral Trade Agreement (BTA) on labor market competition among Vietnamese manufacturing firms. We measure distortionary wedges between equilibrium marginal revenue products of labor (MRPL) and wages nonparametrically and find that the median firm pays workers 59% of their MRPL. The BTA permanently decreases labor market distortion in manufacturing by 3.4%, mainly for domestic private firms. The median distortion is 26% higher for women than men, and the decline in distortion for women drives the overall distortion reduction. We shed some light on the mechanisms for these results.

Job Flow Patterns and Productivity Dynamics in Turkish Manufacturing

In this paper, we analyze the job creation and destruction process, and the productivity dynamics in Turkish manufacturing by size, export status, import status and ownership by using a comprehensive firm-level dataset for the period of 2010–2015. Our focus is on the effect of turnover, which is due to the entry and exit of firms, on both job flows and industrial productivity growth. Our results show that while small firms contribute most to job creation, it is the large firms that contribute most to productivity growth. Regarding ownership, domestic private firms perform better than foreign firms in both job creation and productivity growth. With respect to export status, even though non-exporters outperform exporters in job creation, exporters dominate the productivity growth. As for import status, in job creation, like in the case of export status, non-importers do better but in productivity growth, unlike in the export status, no group of firms dominate, more specifically importers’ and non-importers’ contributions are close to each other. Another interesting finding is that, turnover effect on industry productivity is positive but very low. The role of incumbent firms in generating productivity growth is much higher than that of entering and exiting firms.

Trade, industrial, and privatization policies with endogenous market structure

AbstractThis study finds that in an international mixed oligopoly at free entry equilibrium, social welfare under import tariff cum privatization is higher than output subsidy cum privatization, and the dual subsidy‐tariff policy cum privatization degenerates into a single tariff policy cum privatization. The reason is that an output subsidy or the dual subsidy‐tariff policy will incentivize domestic private firms to enter the free‐entry equilibrium. Thus, the number of domestic firms with free entry is excessive, and social welfare deteriorates. A privatization policy is pivotal in the long run and is still more effective than a single subsidy policy.

Optimal privatisation, and optimum-welfare and maximum-revenue tariffs

We examine the effect of privatisation on the priority of the maximum-revenue tariff and the optimum-welfare tariff in an international mixed oligopoly with foreign competition and optimal privatisation. We demonstrate that when the marginal cost of the domestic privatised firm is high enough, the optimum-welfare tariff will exceed the maximum-revenue tariff. Moreover, due to the higher tariff rate that leads to the high degree of privatisation, the optimum-welfare tariff generates greater optimal privatisation than the maximum-revenue tariff does. Lastly, when the gap between the number of domestic private firms and that of their foreign counterparts becomes larger, the optimum-welfare tariff will exceed the maximum-revenue tariff.

Productivity loss and misallocation of resources in Southeast Asia

This article examines within-sector resource misallocation in three Southeast Asian countries—Indonesia, Malaysia, and Vietnam. The methodology accounts for measurement error in revenues and costs. The firm-level evidence suggests that measurement error is substantial, resulting in an overestimation of misallocation by as much as 30%. Nevertheless, resource misallocation across firms within a sector remains large, albeit declining. The findings imply that there are considerable potential gains from efficient reallocation—above 80% for Indonesia and around 20% to 30% for Malaysia and Vietnam. Private domestic firms and firms with higher productivity appear to face larger distortions that prevent them from expanding.

Firm outward direct investment and multinational activity under domestic taxes

AbstractWe study the effect of domestic corporate tax on firms' outward direct investment (ODI) decisions. We exploit a tax unification reform in China that raises corporate income tax rates on foreign‐funded firms but reduces those on domestic Chinese firms. Using a difference‐in‐differences estimator that compares the ODI of foreign affiliates and joint ventures with private domestic firms before and after the reform, we find that a higher domestic corporate tax rate increased the ODI of foreign firms, particularly for joint ventures with Chinese majority shareholders. We show evidence that the increases in firm ODI reflect production relocation out of China.

Cooperative innovation and crises: Foreign subsidiaries, state-owned enterprises, and domestic private firms

AbstractThis article studies whether foreign subsidiaries (FSs) are able to cooperate for innovation with local partners during good and harsh economic times. It also enquires as to whether these companies and different types of domestic firms displayed similar cooperative behaviour during 2004–16. The period is divided into three sub-periods (boom, downturn, and recovery), and three logit models with panel data of a representative sample of Spanish firms are proposed. The ability of FSs to cooperate for innovation is maintained throughout the business cycle. These firms are better at cooperating than are unaffiliated firms but not significantly better than domestic business groups. State-owned enterprises strongly outperform both FSs and domestic private firms during the boom, the downturn, and the recovery. Unaffiliated domestic firms manage to cooperate during the boom and the recovery but not during the downturn. Predictors of cooperative innovation vary throughout the business cycle. The results contain policy implications.

Import–export nexus and China's emerging trade in environmental goods

AbstractInternational trade in environmental goods (EG) provides a market‐based solution to balance the development–environment relationship. How can developing economies gain new growth opportunities through trade liberalisation in the EGs? This study investigates the structural features of products and firms during the early development of China's EG trade. This study defines the import–export nexus as the product relatedness between imports and exports at the firm level, which may promote the technology spill overs and firm cooperation. This study combines two nationwide data sets and constructs a data panel covering 334 prefectures and 248 EGs during 2001–2012. The conditional logit model with fixed effects is used for coefficient estimation. Empirical results reveal that the import–export nexus promotes new EGs in domestic sectors and export baskets, primarily supported by domestic private firms. The import–export nexus allows state‐owned firms, which only represent a small market share, to enrich export baskets. It also helps foreign firms to develop new EGs in domestic sectors. These findings suggest revisiting the role of state‐owned firms in industrial policy and developing a broad list of EGs to make use of the product relatedness. These will make developing economies like China gain new growth opportunities from the EG trade.

Mixed oligopoly, state-owned banks’ shareholding reform and foreign capital penetration

This paper examines the impact of the policy on eliminating the ratio of foreign shareholding in banks in a mixed oligopoly model. Its analytic results show that state-owned banks should encourage privatisation along with an increasing proportion of the domestic share in multinational banks. Furthermore, we argue that the increase in domestic stockholding of multinational banks raises domestic private firms’ profits but decreases their social welfare in the deposit market. The results of numerical simulation show that when the quantity of private banks is fixed, foreign banks tend to enlarge their stake and strengthen their controlling power.

Credit Access and Zombie Firms: A Study on State-Owned, Private, and Foreign-Invested Firms in A Transition Economy

ABSTRACT The existence of zombie firms is one of the more notable problems in many transition economies since these companies can hamper sustainable economic development. This paper examines the impact of credit access on the existence and recovery of zombie firms. Using a comprehensive dataset comprising a large number of firms operating in Vietnam during the period from 2006 to 2015, we find that having access to credit reduces the likelihood that a firm is a zombie. We also find that credit access is only useful for firms to escape from being zombies up to a certain threshold. While access to credit reduces the likelihood of private domestic firms being zombies, the study finds that it has no significant effect on state-owned and foreign invested firms. Moreover, the impact of credit access is only detected when firms borrow from formal sources of credit.

Do politically connected, economically powerful firms comply with labor laws in China?

PurposeThis study investigates, from a resource dependence perspective, the effects of domestic private firms' political connections and economic power on their labor law compliance in China.Design/methodology/approachThis study used data from a large-scale nationwide survey on Chinese domestic private firms, the Chinese Private Enterprise Survey collected from 2004 to 2012, to examine factors of interest that affect firms' compliance to labor laws. Hypotheses were tested using OLS regression models with robust standard errors.FindingsThe results indicate that domestic private firms' institutional political connections specified by the presence of a union or a Chinese Communist Party committee is positively related to firms' labor law compliance, and firm owners' formal political connections indicated by their membership in the People's Congress or the Chinese People's Political Consultative Conference have a somewhat negative effect. The post-hoc analysis shows that firm owners' political representation at the county and city levels is negatively related with labor law compliance, while the political representation at the national level is positively related to labor law compliance. Moreover, the economic power of a domestic private firm is related positively to its labor law compliance. Finally, although the authors did not find evidence that the 2008 Labor Contract Law increased labor contract coverage, it did increase pension coverage after 2008.Research limitations/implicationsThe present study reveals a more refined relationship between domestic private firm owners’ political connections and the degree of labor law compliance. It also demonstrates that the economic power of domestic private firms has a positive effect on their labor law compliance. This implies the importance of the contribution of domestic private firms to economic and social development in China, warranting continued support of the development of the private sector in China.Originality/valueThis study adds to the sparse literature on the determinants of domestic private firms' labor law compliance in China. It also sheds light on whether political connections and the rising economic power of Chinese domestic private firms influence their compliance with labor laws.

The private sector and multidimensional poverty reduction in Vietnam: A cross‐province panel data analysis

AbstractThis study examines the role of private sector development (PSD) in multidimensional poverty alleviation in Vietnam, using provincial panel data for the 2010–2019 period. PSD is measured as the proportion of the workforce in (i) all private firms, (ii) domestic private firms, and (iii) multinational firms, respectively. We use a two‐step general method of moment estimator to account for unobservable heterogeneity, simultaneity, and the relationship between current provincial characteristics and past provincial poverty. We find that each percentage point increase in private sector employment contributes to a reduction of 0.30% and 0.31% in multidimensional poverty and monetary poverty, respectively. Notably, further analysis confirms that a similar effect is also found for both domestic private and multinational enterprises. In addition, our study finds that economic growth and educational attainment emerge as major factors mitigating multidimensional and unidimensional poverty, while income inequality increases both poverty measures.

Human Capital Expansion and Global Value Chain Upgrading: Firm‐level Evidence from China

AbstractFirms actively participate in the production of the global value chain (GVC), which is an important driving force for economic development. Using a difference‐in‐difference method, our research shows that industries that are relatively more human‐capital intensive experienced a larger GVC position upgrading after 2003 than they had in prior years. Second, mechanism analysis shows that human capital expansion increases firms’ GVC position not only through an imported intermediate input effect but also through an innovation effect. Third, this study shows that increases in the college‐educated labor force have a heterogeneous effect on a firm's GVC position across firms’ various characteristics. Human capital expansion has the largest positive effect on state‐owned firms relative to foreign and domestic private firms. Human capital expansion has also significantly improved the GVC position of firms located in China's eastern and central regions. The findings of this study indicate that it helps upgrading the GVC position of Chinese firms.

Strategic Authoritarianism: The Political Cycles and Selectivity of China's Tax‐Break Policy

AbstractA rich literature has noted political business cycles in democracies. We argue that in an autocracy with strong bureaucratic institutions, the pressure of evaluation and promotion has also generated political cycles of tax‐break policies. Furthermore, the timing and content of the evaluation have driven leaders to use tax breaks strategically to build economic performance, producing distributional consequences. Combining panel data of 1,510,153 firm‐year observations, city‐leader data from 1995 to 2007, and field interviews, we find that the tax‐break rates dropped for most firms during mayors’ turnover years. In the first year of office, that is, the “busy year,” mayors needed to prioritize large firms and especially large foreign firms. Small domestic private firms bore the cost of tenure cycles. In the last year of the mayors' tenure, that is, the “dust‐settled” year, there was little incentive to seek promotion, and even important firms could not gain the mayors' attention.

Firms and regional favouritism

AbstractUsing an unbalanced panel of 539 Vietnamese districts from 2000 to 2010 and the corresponding politicians’ profiles, we examine firm behaviour in response to favouritism by top‐ranking politicians towards their districts of birth. Results show that the number of firms tend to increase in the home districts of politicians after they assume office. This favouritism is particularly pronounced for private domestic firms, construction firms and rural areas. However, state‐owned firms are indifferent. We discuss the non‐response of state‐owned firms, potential mechanisms and channels behind the statistical results.

Private Ownership Structure and Firm Productivity: A Firm - Level Empirical Evidence from Nigeria

Private-owned firms make up a large chunk of the firms existing in different countries of the world, especially Nigeria, and as such, contribute its quota to economic activities and growth of the economy. This study examined private ownership structure and firm productivity from the angle of firm - level empirical evidence from Nigeria using World Bank, Nigeria enterprise survey 2014 data and applied econometric model based on OLS technique. It was found among others by the study that a percentage increase in firms owned by private domestic individuals, companies or organizations (private domestic owned firms), would on the average have a significant positive impact on firm productivity in Nigeria by about 0.217276 units. In line with this, the study concludes that private domestic owned firms has positive significant impact on firm productivity in Nigeria. The study recommended among others that government should create more enabling/conducive business environment for private domestic firms to thrive and contribute more to overall economic growth and development. When this done, it will significantly increase employment, especially youth employment, reduce poverty and the menace of insecurity, increase per capita incomes, raise overall standard of the living of the people, and finally contribute significantly to economic growth and development of not only Nigeria, but Africa at large.

Assessing the value of China's patented inventions

This study provides one of the first systematic and direct assessments of the value of China's inventions and examines the strategic factors influencing their value, using patents granted to firms by the China National Intellectual Property Administration (CNIPA). To do this, we first review the theoretical background of these factors and the inventor survey approach to estimating patent value. We then conduct the analysis using the large-scale, comprehensive annual Inventors Survey database (ISDB) collected by CNIPA, which consists of 12,869 firms linked to 30,693 patents granted between 2010 and 2012. We find that the median and average revenues from firms’ implementation of their patents are RMB 0.75 million and 8.04 million respectively. Furthermore, we find that patents involving higher R&D investments, invention patents, patents essential to standards and belonging to patent pools command a higher value. State-owned enterprises (SOEs) produce lower value patented inventions relative to domestic private firms and foreign firms. Larger firms and those with intellectual property departments and aggressive in patent litigation have higher value inventions. Our findings yield important theoretical, methodological and policy implications.

Export spillover from foreign direct investment in China during pre- and post-WTO accession

This study investigates the effects of export spillover from foreign direct investment (FDI) before and after China’s World Trade Organization (WTO) accession, with particular consideration of the FDI source country and firm ownership structure. It uses a Chinese manufacturing firm-level panel dataset, for the period 1998–2007. In general, there are no spillover effects among state-owned enterprises (SOEs). This study finds negative horizontal and positive vertical spillovers associated with FDI from Hong Kong, Macao, and Taiwan (HMT) among non-SOEs. Furthermore, non-HMT FDI, which is predominantly from the Organisation for Economic Co-operation and Development (OECD) countries, have statistically significant positive horizontal and vertical spillover effects on the export performance of private Chinese firms. Positive forward spillovers occurred only after China joined the WTO, while positive backward spillovers existed during both the pre- and post-WTO periods. China’s entry into the WTO intensified the forward linkage of production, implying that greater availability of high-quality inputs produced by non-HMT foreign multinationals benefited the export performance of private domestic firms.

Venture Capital and Private Equity Investors, Governance and Success of IPOs – Evidence from India

In this study, we are the first to examine the role of domestic and foreign venture capital and private equity firms (VCPEs) in Indian firms. We find robust evidence to indicate that portfolio firms backed by foreign VCPEs incorporate effective governance structures in the post-IPO period. Specifically, these firms are associated with smaller, more independent and gender-diverse boards. Furthermore, our results suggest that foreign VCPEs continue their association with their portfolio firms in the post-IPO period by nominating directors to the boards. Our results also suggest that portfolio firms backed by foreign VCPEs are associated with better long-term operating performance and profitability. We note that this positive effect is exacerbated by the presence of VCPE nominated directors on the boards. Collectively, our results provide credence to the view that good governance practices are key to long term success of a business, especially in economies that may lack good legal systems, developed financial markets and a variety of alternative investment opportunities and where developing trust between parties involved in a transaction is more important.