Reform and competitive selection in China: An analysis of firm exits

This paper considers aspects of the competitive selection process in China – firm entry, survival, and exit – in an important sector of manufacturing, looking in particular for changes resulting from the process of reform. Using industry census data from a province in North-East China, we find substantial differences in the process between ownership types. By conducting decompositions of aggregate growth and exploring the determinants of firm's exit using a hazard rate model, we observe a substantial rate of churning of enterprises in the sector, finding that the competitive selection processes operate, for small and collectively owned enterprises (COEs), in a manner consistent with what is known about a private market economy. While the hazard for state owned enterprises (SOEs) is lower than for COEs, we find that the reforms introduced in 1992 were important in closing the gap for similarly situated firms.

► The paper studies the competitive selection process among firms in China.
► The entry and exit of firms are shown to be key aspects of competition and growth.
► A hazard rate model shows that performance is an important determinant of firm exit.
► The research finds that State Owned Enterprises face a lower probability of exit.
► Reform has increased exit probabilities, especially among State Owned Enterprises.