Barriers to Entry and Regional Economic Growth in China

Abstract Labour productivity in manufacturing differs starkly across regions in China. We document that productivity, wages, and start-up rates of non-state firms have nevertheless experienced rapid unconditional regional convergence after 1995. To analyse these patterns, we construct a Hopenhayn model that incorporates location-specific capital wedges, output wedges, and entry barriers. Using Chinese Industry Census data, we estimate these wedges and examine their role in explaining differences in performance and growth across prefectures. Entry barriers explain most of the differences. We investigate the empirical covariates of these entry barriers and find that changes in barriers are causally related to changes in the size of the state sector: a smaller state sector leads to lower entry barriers.