Entry Deregulation, Market Turnover, and Efficiency: China’s Business Registration Reform

Abstract

Although entry regulation is ubiquitous across countries, comprehensive evaluations on how such regulations affect firm dynamics and productivity are lacking. We examine a 2012-2014 pilot program in Guangdong (which later became a national policy) that was designed to reduce firm registration costs and encourage entrepreneurial activities. We leverage the pilot program’s staggered implementation to address the key identification challenge of policy endogeneity. Using administrative data on firms’ business registrations and annual reports from 2008-2016, as well as field surveys, our analysis shows that the reform increased firm entry by 25% and firm exit by 8.7% in the manufacturing sector. Altogether, these newly registered firms as a result of the entry deregulation increased Guangdong’s total employment and revenue in the manufacturing sector by 2.5% and 1.8%, respectively. In addition, the productivity of post-reform entrants was 1.0% higher than the productivity of pre-reform entrants, likely due to the combination of relaxed financial constraints and more intense competition.

Keywords: Entry deregulation, productivity, market turnover

JEL Classification: L10, L50, L60, O40