Determinants of Firm Failure: Empirical Evidence from China

Abstract

During the economic transition, Chinese industries are highly dynamic, with substantial firm entry and failure. This study investigates the driving forces of firm failure in China. Based on the annual survey of industrial firms during 1998–2007, this study first describes the patterns of firm failure. On average, less productive and older firms are more likely to fail, while firms with governmental supports are more likely to survive. Statistical results based on the linear probability model for panel data indicate that market competition crowds out less productive firms. Competition dominates learning effects and imposes challenges on the survival of older firms. There is an inverted U‐shaped relationship between firm age and firm failure. Local supportive policies such as subsidies and banking loans can reduce the chance of firm failure. Governmental policies also moderate the impact of productivity and firm age on firm failure. The findings from this study enrich the understanding of industrial dynamics in the transitional China.

On the shifting spatial logics of socioeconomic regulation in post-1949 China

“…As Yang and He (2014: 369) demonstrate, "productive firms enjoying local protection are less likely to export" since they benefit local monopoly advantages; conversely, less productive exporting firms tend to agglomerate to enjoy "exporting spillover effects" that allow them to directly enter international markets. In a separate study on the relationship between local protectionism and firm failure, He and Yang (2015) found firms enjoying direct subsidies and loans from formal institutions are less likely to fail. The critical determinant between survival and shutdown is access to rather than the quantity of support: "[w]hether firms get subsidies and banking loans actually is more important than how much they get since both subsidies and loans represent governmental support" (He and Yang, 2015: 9).…”

Regional industrial evolution in China

“…They are not in the position to select new industries based on the existing knowledge and competence. Correspondingly, industries, particularly those technologically related to the existing industrial structure are less likely to exit from the regions with a healthy fiscal situation since they can provide subsidies to keep industries, even less productive firms (He and Yang ). Fiscal decentralization has triggered the interregional competition in attracting business.…”

Agglomeration, (un)‐related variety and new firm survival in China: Do local subsidies matter?

“…He and Yang (), for instance, find that state support programmes (proxied by a dummy variable for whether or not a firm received public subsidies) directly improve the chances of firm survival in China, indicating that subsidies are an effective tool to help buffer domestic Chinese firms from negative competition effects with foreign enterprises. Beyond their direct effects, however, the authors do not consider whether subsidies may also indirectly influence firms' survival chances and subsequent performance depending on the local industrial structure.…”

“…To incorporate a spatial perspective into the literature, economic geographers have increasingly focused their attention on studying the mechanisms of agglomeration and how externalities influence firm survival. A growing number of empirical studies now exist that study the effects of spatial externalities on firm survival in countries ranging from Greece (Fotopoulos and Louri ), to the US (Acs et al ), Germany (Fritsch et al ; Falck ), UK (Boschma and Wenting ) and China (Howell ; He and Yang ). The findings from these studies, however, are mixed and sometimes directly contrast one another.…”

“…Similarly in the German context, Staber () studies the knitwear industry and finds that localization economies led to higher failure rates, while diversification reduced failure rates. In China, He and Yang () find that specialization decreases the survival chances of Chinese firms, although the opposite effect is found for urbanization economies.…”