Local State-Owned Enterprise Presence : Growth, Reallocation and Selection

A strong state sector can act as an adverse factor shock in a relatively fixed factor supply environment. Low factor mobility across regions makes China an ideal setting to study this factor supply channel. We find that a strong local SOE presence has a substantial adverse growth effect on local firms in employment and capital, especially the latter. The adverse capital effect particularly hurts more productive firms due to financial frictions. However, the relative factor scarcity is compensated by higher productivity growth---particularly among firms with low productivity. A strong local SOE presence also impedes low-productivity entrants. These results imply that the state sector has a broader impact than the general perception