Growing through Competition: The Reduction of Entry Barriers among Chinese Manufacturing Firms

Using the World Bank's Starting a Business score as a measure of administrative and regulatory entry barriers, we show evidence from the firm-level data of the Chinese manufacturing sector that regions with lower entry barriers experience higher productivity growth and more competition. We interpret these facts through the lens of a model of endogenous productivity and endogenous market structure with ex-ante heterogeneous firms and assess that about 32% of the productivity growth in the Chinese manufacturing sector in 2005-9 is contributed by increased entry following the reduction of those entry barriers. Moreover, 40% of the gain in growth is driven by improving the type distribution of incumbent firms (a replacement effect) and 60% of the gain in growth is driven by fiercer market competition (a new pro-competitive effect).