We investigate firms’ divestment behavior in China. We find that negative investment by private firms is due to financial constraints, while SOEs divest mainly for inefficiency reasons. Rapid economic growth counterweighs both effects.
This paper addresses a puzzle in China’s investment pattern: despite high aggregate investment and remarkable economic growth, negative investment is commonly found at the microeconomic level. Using a large firm-level dataset, we show that private firms divest in order to raise capital. We also find that, owing to over-investment and mis-investment in the past, state-owned firms have had to restructure by getting rid of obsolete capital in the face of increasing competition and hardening budget constraints. Finally, rapid economic growth counterweighs both effects for all types of firms, with a larger impact in the private and foreign sectors.
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Sai Ding, Alessandra Guariglia, and John Knight
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