Firm Size and Economic Growth in China-Evidence from Chinese Industrial Firms

Abstract

A vast amount of literature is available on the determinants of economic growth and development, and many factors and variables have been suggested theoretically and empirically. Numerous studies have investigated the role played by big businesses as well as small and medium enterprises (SMEs) in promoting economic growth. All of these studies suggest that the net influence of firm size on macroeconomic performance is an important yet unresolved empirical question. In China, the linkage between firm size and economic growth remains unexplored, and no study has examined the entire spectrum of firm size to explore the development dynamics of China. To fill this research gap, this paper presents exploratory empirical evidence based on provincial-level data obtained from 2004 to 2009 in China. We measure firm size in terms of relative sales, relative number of these firms, or absolute number of firms of different sizes in each province. The empirical results of all of the models consistently show three major patterns. First, big businesses have a significant and negative effect on economic growth, medium-sized firms have an insignificant effect on economic growth, and small firms have a significant and positive effect on economic growth. Second, the average size of big businesses and SMEs has a positive effect on economic growth, whereas the number of firms of different size exerts a negative effect on the economy. The average size of various size groups of enterprises, rather than the number of firms, is important in Chinas economy. Third, differences in efficiency translate to differences in contribution. Disparity in efficiency exists among large, medium, and small enterprises. This disparity is the primary cause of the performance gap in China.