Negative investment in China : financing constraints and restructuring versus growth

Abstract

This paper attempts to address a puzzle in China’s investment pattern: despite high aggregateinvestment and remarkable economic growth, negative net investment is commonly found at themicroeconomic level. Using a large firm-level dataset, we test three hypotheses to explain theexistence and extent of negative investment in each ownership group: what we term the efficiency (or restructuring) hypothesis, the (lack of) financing hypothesis, and the (slow) growth hypothesis. Ourpanel data probit estimations shows that negative investment by state-owned firms can be explainedmainly by inefficiency: owing to over-investment or mis-investment in the past, these firms have hadto restructure and to get rid of obsolete capital in the face of increasing competition and hardeningbudgets. The financing explanation holds for private firms, which have had to divest in order to raisecapital. However, rapid economic growth weighs against both effects in all types of firms, with alarger impact for firms in the private and foreign sectors. A tobit model, estimated to examine thedeterminants of the amount of negative investment, yields similar conclusions.