Subsidy competition, industrial land price distortions and overinvestment: empirical evidence from China’s manufacturing enterprises

ABSTRACT

In China, offering inexpensive industrial land is a major means for local governments to participate in interregional subsidy competition, which caused regional industrial land price distortions. This article examines the effect of regional industrial land price distortions on the overinvestment of Chinese manufacturing enterprises. Chinese industrial enterprises data and land price monitoring data of 49 major cities in China between 1998 and 2007 are employed. This article has found that industrial land price distortions will significantly stimulate the overinvestment of manufacturing enterprises. Such a promoting effect varies among manufacturing enterprises of different ownership and industry attributes. Industrial land price distortions have the most significant promoting effect on the overinvestment of foreign-invested firms, followed by private firms, while state-owned enterprises are the least affected. Compared with private heavy-industry firms, industrial land price distortions have a more significant effect on the overinvestment of private light-industry firms. Compared with foreign-invested heavy-industry firms, industrial land price distortions have a more significant effect on the overinvestment of foreign-invested light-industry firms. This study represents a positive exploration and supplement to the existing studies on the effects of subsidy competition on corporate investment behaviours and the studies on Chinese-style subsidy competition.

KEYWORDS:

• Subsidy competition
• industrial land
• price distortions
• overinvestment
• regional competition

JEL CLASSIFICATION:

• D21
• H71
• R52

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ After 2002, corporate income tax and personal income tax have been changed into shared taxes.

² The National Standard of Minimum Prices for Industrial Land Transfer prescribes the minimum price standards for industrial land transfer according to land grades, while in many regions, land plots are of different grades. Thus, this article determines the minimum price standards of industrial land transfer by the grade of land that represents the highest proportion in the region.

³ According to the classification standard of two-digit sectors, this article divides two-digit sectors of GB/T25–37, 39–41, 43 into heavy industry and two-digit sectors of GB/T13–24, 42 into light industry.

Additional information

Funding

This work was supported by the Key Program of the National Natural Science Foundation of China [grant number 71633006].