Diversity of firm sizes, complexity, and industry structure in the Chinese economy

• Study of the firm size distribution by province in China over a range of 10 years.
• Power-law exponents between 2.0 and 2.5 (with a few outliers) are estimated.
• Higher exponents tend to coincide with higher growth and lower average age of firms.
• Based on the literature review 7 possible explanations for the observed pattern are given PRC.

Among the phenomena in economics that are not yet well-understood is the fat-tailed (power-law) distribution of firm sizes in the world's economies. In the present paper we discuss different mechanisms suggested in the literature to explain this distribution of firm sizes. The paper uses the China Industrial Enterprises Database to study the distribution (firm size in terms of the number of employees, capital, and gross profit) for the provinces of China for the years 1998–2008. We estimate the power-law distribution and confirm its plausibility using the KS test and the log-likelihood ratio vs. lognormal and exponential distributions. The analysis on regional levels allows an assessment of regional effects on differences in the distribution; we discuss possible explanations for the observed patterns in the light of the recent regional economic development and the economic reforms in the PRC.