China's Declining Business Dynamism

IMF Working Papers, February 18, 2022

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After impressive growth in the 2000s, China's productivity has more recently stagnated.
The authors use firm-level data to analyze productivity and firm dynamism trends from 2003 to 2018.
The paper documents six facts that together show a decline in China’s business dynamism.
The 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.

(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.
(vi) large productivity gaps between SOEs and private firms persist.

Business dynamism is weaker in provinces where SOEs account for a larger share of the capital stock.
Slower life-cycle growth is linked to both slower productivity growth and weaker investment in intangibles.
Capital constraints are disproportionately borne by younger and smaller firms, limiting their growth and dynamism.

SOE reform could boost productivity growth indirectly by stimulating business dynamism.
Policies that alleviate capital constraints for younger and smaller private firms and that encourage investment in intangibles may help reverse declining business dynamism and support TFP growth.