Barriers to Entry and Regional Economic Growth in China

Labor productivity in manufacturing differs starkly across regions in China. The paper presented in this ZEW Research Seminar documents that productivity, wages, and start-up rates of non-state firms have nevertheless experienced rapid regional convergence after 1995. To analyze these patterns, the authors construct a Hopenhayn (1992) model that incorporates location-specific capital wedges, output wedges, and entry barriers. Using Chinese Industry Census data the paper estimates these wedges and examine their role in explaining differences in performance and growth across prefectures. Entry barriers explain most of the differences. The authors investigate the empirical covariates of these entry barriers and show that barriers are causally related to the size of the state sector.