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WP/22/32
IMF Working Paper
Asia and Pacific Department and Research Department
China’s Declining Business Dynamism
Prepared by Diego A. Cerdeiro and Cian Ruane
Authorized for distribution by Helge Berger and Chris Papageorgiou
February 2022
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate . The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: After impressive growth in the 2000s, China’s productivity has more recently stagnated. We use firm-level data to analyze productivity and firm dynamism trends from 2003 to 2018. We document six facts that together show a decline in China’s business dynamism. We show that (i) the revenue share of young firms has declined, (ii) the life-cycle growth of young firms relative to older incumbents has slowed, (iii) weaker life-cycle growth can be explained by slower productivity growth and weaker investment in intangibles, (iv) younger and smaller firms are more capital constrained than their older and larger counterparts, (v) the responsiveness of capital growth to the marginal product of capital has declined, and (vi) large productivity gaps between SOEs and private firms persist. We find that business dynamism is weaker in provinces where SOEs account for a larger share of the capital stock. Our results suggest that declining private business dynamism is an important factor in explaining China’s sluggish TFP growth and that SOE reform could boost productivity growth indirectly by stimulating business dynamism.
| JEL Classification Numbers: | O11, O47. |
| Keywords: | China, total factor productivity, growth, business dynamism. |
| Author’s E-Mail Address: | dcerdeiro@imf.org; cruane@imf.org |
| JEL Classification Numbers: | O11, O47. |
| Keywords: | China, total factor productivity, growth, business dynamism. |
| Author’s E-Mail Address: | dcerdeiro@imf.org; cruane@imf.org |
Title Page
China’s Declining Business Dynamism*
Diego A. Cerdeiro† Cian Ruane‡
IMF IMF
January 14, 2022
Abstract
After impressive growth in the 2000s, China’s productivity has more recently stagnated. We use firm-level data to analyze productivity and firm dynamism trends from 2003 to 2018. We document six facts that together show a decline in China’s business dynamism. We show that (i) the revenue share of young firms has declined, (ii) the life-cycle growth of young firms relative to older incumbents has slowed, (iii) weaker life-cycle growth can be explained by slower productivity growth and weaker investment in intangibles, (iv) younger and smaller firms are more capital constrained than their older and larger counterparts, (v) the responsiveness of capital growth to the marginal product of capital has declined, and (vi) large productivity gaps between SOEs and private firms persist. We find that business dynamism is weaker in provinces where SOEs account for a larger share of the capital stock. Our results suggest that declining private business dynamism is an important factor in explaining China’s sluggish TFP growth and that SOE reform could boost productivity growth indirectly by stimulating business dynamism.
Keywords: China, total factor productivity, growth, business dynamism.
JEL codes: O11, O47.
We would like to thank Helge Berger and Joong Shik Kang for very helpful discussions that helped shape the paper. Any opinions and conclusions expressed herein are those of the authors and do not necessarily represent the views of the IMF, its Executive Board, or its management.