SOEs Reform and Capital Efficiency in China: A Structural Analysis

Abstract

This paper investigates the effect of state-owned enterprises reform, a policy phrased as “grasping the large, letting the small go” on firms' capital efficiency in Chinese industrial firms. First, we present several styled facts on investment rates in state and private industrial firms from 1998-2007. Then a dynamic programming problem is proposed and key structural parameters are recovered through simulated moment matching method. The estimated dynamic model is able to replicate the styled facts from actual data. Our quantitative analysis shows that the conversion of state firms into private ones reduces capital adjustment costs, in particularly, the quadratic adjustment cost. Thus, the conversion of state firms leads to increased capital efficiency. Based on the structural estimations, we find that state and private firms' output would increase about 2% if the capital adjustment costs in state firms are lowered to the same level in private firms.