China's Declining Business Dynamism

IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. ABSTRACT: After impressive growth in the 2000s, China's productivity has more recently stagnated. We use firm-level data to analyze productivity and firm dynamism trends from 2003 to 2018. We document six facts that together show a decline in China’s business dynamism. We show that (i) the revenue share of young firms has declined, (ii) the life-cycle growth of young firms relative to older incumbents has slowed, (iii) weaker life-cycle growth can be explained by slower productivity growth and weaker investment in intangibles, (iv) younger and smaller firms are more capital constrained than their older and larger counterparts, (v) the responsiveness of capital growth to the marginal product of capital has declined, and (vi) large productivity gaps between SOEs and private firms persist. We find that business dynamism is weaker in provinces where SOEs account for a larger share of the capital stock. Our results suggest that declining private business dynamism is an important factor in explaining China's sluggish TFP growth and that SOE reform could boost productivity growth indirectly by stimulating business dynamism. Abstract After impressive growth in the 2000s, China’s productivity has more recently stag-nated. We use ﬁrm-level data to analyze productivity and ﬁrm dynamism trends from 2003 to 2018. We document six facts that together show a decline in China’s business dynamism. We show that (i) the revenue share of young ﬁrms has declined, (ii) the life-cycle growth of young ﬁrms relative to older incumbents has slowed, (iii) weaker life-cycle growth can be explained by slower productivity growth and weaker investment in intangibles, (iv) younger and smaller ﬁrms are more capital constrained than their older and larger counterparts, (v) the responsiveness of capital growth to the marginal product of capital has declined, and (vi) large productivity gaps between SOEs and private ﬁrms persist. We ﬁnd that business dynamism is weaker in provinces where SOEs account for a larger share of the capital stock. Our results suggest that declining private business dynamism is an important factor in explaining China’s sluggish TFP growth and that SOE reform could boost productivity growth indirectly by stimulating business dynamism. data and conﬁrm the productivity growth slowdown. We then document six facts that show a decline in China’s business dynamism. We show that (i) the revenue share of young ﬁrms has declined, (ii) the life-cycle growth of young ﬁrms relative to older incumbents has weakened, (iii) this is related lower physical productivity and innovation, (iv) younger and smaller ﬁrms are more capital constrained than their older and larger counterparts, (v) the responsiveness of capital growth to ﬁrms’ marginal products of capital has weakened, and (vi) there are large and persistent productivity gaps between SOEs and private ﬁrms. In the cross-section of provinces, we ﬁnd that where SOEs account for a larger share of assets, business dynamism tends to be weaker. The ﬁndings underscore the need for China to undertake pro-market reforms to boost productivity growth. In particular, SOE reform could boost productivity growth both directly through resource reallocation and indirectly by stimulating business dynamism.