Governments all over the world frequently spend a huge sum of money to support companies. Some, though, spend as much as China. According to the A & nbsp report for 2022, China invests 1.7 – 5 % more in industrial policies than the majority of other nations.
Direct subsidies to Chinese listed companies have increased significantly from 5 % of listed firms’ gains in 2010 to almost 14 % in 2015, as Chinese economy expert Nicolas Lardy demonstrates. This upward trend is supported by our own estimates. Government grants for Chinese-listed businesses increased by a factor of more than tenfold between 2007 and 2018.
China’s business grants and nbsp have generated a lot of debate both domestically and abroad. Investing partners have charged China with badly favoring and subsidizing its domestic businesses, putting international businesses at a disadvantage in the race to dominate the next wave of technologies.
Supporters within China contend that business subsidies are required for the country to develop its industries and achieve technological self-sufficiency. However, detractors claim that policymakers have harmed secret, little, and medium-sized businesses by favoring large state-owned enterprises and national champions.
Authorities subsidies’ main economic justification is to correct market failures, but wasting taxpayer money carelessly may cause more market distortions. Research indicates that there are mixed results regarding the impact of state subsidies on production, with research finding no effects at all.
Since 2007, Chinese laws has mandated that publicly traded companies provide details regarding the quantity and justifications for government incentives received during the prior fiscal year. With the exception of financial services companies, we took advantage of this legislation and classified incentives received by companies listed on the Shanghai and Shenzhen stock markets between 2007 and 2018 using Google’s BERT( an AI-powered healthy vocabulary model ).
However, when categorizing subsidies, information disclosure omissions and ambiguities show that Chinese companies often fail to disclose subsidy information despite disclosure requirements.
Therefore, it is important to proceed with caution when interpreting results based on categorized grants because these findings only apply to businesses that disclose the intricacies of the incentives they received.
We carried out an experimental research in two stages. To determine the total-factor productivity( TFP ) for each company each year, it first involved estimating standard Cobb-Douglas production functions for every industry. Two models were used to determine the relationship between federal incentives and the estimated TFP.
The idea that the Chinese government regularly” picks winners” is not supported by the study. TFP and subsidies seem to have a bad relationship, suggesting that the state does not give productivity priority when allocating subsidies. & nbsp,
On the other hand, there is a strong positive correlation between grants and net income as well as business length, as measured by overall property. These findings imply that, despite the possibility of lower productivity, subsidies are primarily given to larger and more successful businesses.
Additionally, there is scant evidence that grants are to blame for the rise in TFP. There is a sizable negative effects on TFP growth overall. When examining payment categories separately, subsidies for research, development, and development promotion don’t seem to have a statistically significant positive impact on the productivity growth of businesses. The same holds true for subsidies for business and products upgrades.
Receiving a payment, however, does appear to be correlated with an increase in the number of employees at businesses. At the overall level, recent subsidies seem to have a positive effect on current employment levels, whereas the subsidies from the previous year appear to be negative. This implies that businesses may be carefully adjusting career to receive subsidies.
In conclusion, the results refute the idea that Chinese businesses’ increased productivity is a result of grouped or various types of direct subsidies. Although there is some evidence that subsidies may increase short-term career, this could potentially lower productivity by causing businesses to keep extra workers and preventing the best resource allocation to the most productive businesses.
China has experienced, decreased, increased, and increased efficiency. According to our research, China’s present subsidy programs might not be the best option for addressing the economic slowdown brought on by aging population, a declining labor force, and declining returns on capital investment.
Professor of Economics and Public Policy at Carnegie Mellon University’s Heinz College is Lee Branstetter.
At the Federal Energy Regulatory Commission, Mengjia Ren works as an analyst. She earned her Doctoral at Carnegie Mellon University’s Heinz College.
At ShanghaiTech University’s School of Entrepreneurship and Management, Guangwei Li teaches as an assistant teacher.
This andnbsp, post, and was initially published by East Asia Forum and are being reprinted with a Creative Commons license.
The authors’ December 2022 NBER working paper,” Picking winners ,” is summarized here. Government subsidies and strong productivity in China, according to a study published in the