Market Structure, Resource Allocation, and Industry Productivity Growth : Firm-Level Evidence from China’Ssteel Industry

Market reforms can improve a country’s aggregate productivity growth by reallocating resources from the less to more productive firms. However, not all market reforms end up generating the intended resource reallocation effect. This paper investigates how regional monopolies have limited the role of market reforms in cross-firm resource reallocation. We develop a monopolistic competition model showing that dominant firms within the local market may limit more productive firms from expanding, and test the theoretical hypothesis by using a large panel dataset covering 11,136 firms for the 1998-2009 period. Our results show that market reforms in China’s iron and steel industry strengthen competition at the national level but do not improve within-province resource reallocation. Because of provincial-level market monopoly, resource reallocation only accounted for 14% of industry-level productivity growth. The results shed light on the importance of removing regional monopoly for developing countries undergoing market reforms to improve resource allocative efficiency