Misallocation in China: Evidence from China's business registration reform

Abstract

This study investigates the impact of entry deregulation on resource misallocation by exploring a pilot of China's business registration reform in Guangdong province. We use a staggered difference-in-differences approach and show that the reform increased capital and labor inputs by 82.2 % and 38.3 %, respectively, in high-productivity compared to low-productivity industries. These increases led to a convergence in productivity, as high-productivity industries experienced declines of 49.6 % and 37.4 %, respectively in capital and labor productivity. For firms in the same industry, the deregulation resulted in 28.6 % and 27.9 % increases in capital and labor inputs and 32.5 % and 32.2 % reductions in capital and labor productivity for high-productivity relative to low-productivity firms. Our findings suggest that the reform facilitated resource reallocation across industries and improved efficiency by channeling capital toward more productive firms within the same sector, reducing misallocation at the inter- and intra-industry levels. The results of this paper offer insights regarding the reform of new business registration through the amendment of China's company law.