Summary： In recent years, a consensus has formed on the necessity and possibility of the construction and development of a political economy of socialism with Chinese characteristics. However, scholars have different opinions on what constitutes a political economy of socialism with Chinese characteristics(hereafter referred to as PESCC),how it should be built, and who should build it. We provide our answers in this paper.
We argue that PESCC is essentially the product of the integration of the principles of Marxist political economy with the experiences of reform, opening and socialist modernization in contemporary China. It must serve the people and be scientific, practical, developmental, and open. To be scientific means to adopt the methodology of dialectical and historical materialism to study the basic national conditions, the specific developmental stage, and the economic institutions and distribution institutions on which socialism with Chinese characteristics is based. To serve the people means to work for the fundamental interest of most people, to help meet the people's ever-growing needs for a better life, and to maintain the people's principal position in the country. To be practical means to pay attention to what is going on in the real world, to be oriented by the significant issues that emerged during the processes of reform and opening, and to develop a systematic theory based on these experiences that supports the building of a modern socialist country and the Chinese dream of the brilliant prospects of rejuvenation. Development infers the opposite of dogmatism, closedness, and conservatism. PESCC must deepen our understanding of the development of the real economy and practice and study the new problems raised in new eras while responding to the new challenges in the global economy. To be open means to allow for the trends of economic globalization, world multi-polarization, the emerging information society, and the increasing culture diversity, to reflect the requirements of an era of peace and development, to learn from all useful economic theories including the economics of developed countries, and to contribute Chinese wisdom to the economic development of China and of the world. These five properties are the essential features and requirements of PESCC.
With these requirements in mind, we then answer the question of how to construct PESCC. First, we should insist on building on the guiding principles of Marxism to not just inherit but also innovate Marxist political economy. Second, we should summarize the experiences of reform, opening, and modernization in contemporary China and advocate for those excellent economic thoughts in the Chinese tradition. Third, we should focus on the current reality and study the significant issues raised during development. Also, we should develop a theory that is grounded in China but that does not neglect global issues. Finally, we should focus on special topics while still pursuing a systematic theory.
We also consider the question of who should construct PESCC. As we argue, the mission of PESCC is to meet the practical needs of development in the new era, to respond to concerns arising from economic development in China and around the world, and to serve the Chinese people and all humans. Therefore, to construct and develop such a theory cannot be done by a single discipline or a small group of scholars. Instead, it requires the efforts of many different disciplines and a large community. Of course, scholars in political economy should work harder and contribute more.
At this important moment of the construction and development of PESCC, our paper discusses the orientation, the method, and the actors involved in the theory building. These claims can play a positive role in the development of PESCC.
Keywords： Reform and Opening;The Construction and Development; Marxist Political Economy; Political Economy of Socialism with Chinese Characteristics
JEL Classification： B14, B24, B51

Summary： In the early days of the People's Republic of China, China had a large population but was weak nationally, had poor economic foundations, and suffered from uneven development across regions. There were a thousand things to be done and a variety of actual and potential internal and external challenges, such as the long-term blockade imposed by Western advanced industrial countries on China, which forced the prioritization of heavy industry in development plans. Statistics show that in the planned economy period, which prioritized heavy industry, China's real GDP achieved average annual growth of 6.1% between 1952 and 1978, despite the many political movements during this time. China emerged from this period with a complete industrial and national economic system and with considerable progress made in various industries.
Despite the remarkable achievements, the development strategy of prioritizing heavy industry is not advised by mainstream economists as it leads to price distortions and the inefficient allocation of resources. Academics have argued about the correct historical stage for prioritizing the development of heavy industry. It is of great theoretical and practical significance to clarify the relationship between development plans that prioritize heavy industry and economic growth, as this will help to understand the political and economic logic of economic growth before and after reforms.
Prioritizing the development of heavy industry has an inherent historical logic for late-developing countries. As a basic industry, heavy industry provides the necessary material and institutional structure for a later strategy built on comparative advantage. To achieve sustained and long-term economic growth, it is necessary to prioritize the development of heavy industry, which has positive externalities at certain stages, and to build a basic industrial system and national economic system that meet the “threshold condition” for the full implementation of a strategy based on comparative advantage. After crossing the threshold condition, the basic industries and infrastructure necessary for the industrialization of late-developing countries are present and the strategy of comparative advantage will inevitably be selected.
Therefore, for a developing country with a large agricultural sector, the question is not whether to prioritize the development of heavy industry, but when should this stage begin? When should it end? What is the “threshold condition”? When should a country shift to a comparative advantage strategy? This article answers the questions of why prioritizing the development of heavy industry is necessary for long-term economic growth, what the “turning point” of the growth effect of heavy industry being sufficiently large is, and why a development strategy prioritizing heavy industry will give way to a strategy prioritizing comparative advantage.
By unifying history and logic and based on the consistency between the government utility level and the development degree of heavy industry, this paper constructs a dynamic optimization model which includes a capital-intensive sector and a labor-intensive sector to study the rationality of a development strategy that prioritizes heavy industry and its influence on economic growth. The results show that on the dynamic path of government utility optimization, the proportion of the capital stock of heavy industry decreases with increases in the capital-output elasticity in labor-intensive sectors and increases with increases in the capital-output elasticity in capital-intensive sectors. The proportion of the capital stock of heavy industry and the total output of the whole society forms an inverted “U” relationship. To test the conclusions derived from the theoretical model, this paper uses data on 28 provinces from 1953 to 1978 to estimate the parameters based on the static and dynamic panel models. The results show that there is an inverted “U” relationship between the proportion of the capital stock of the heavy industry and the total output of the whole society and that the critical value for the proportion of the capital stock of the heavy industry acting on the total output of the whole society is about 0.4.
Keywords： Priority Development Strategy of Heavy Industry; Comparative Advantage Strategy; Economic Growth; Inverted “U” Theory
JEL Classification： N65, O43, O49, P29

Summary： Fiscal decentralization has been divided into two separate problems since it was introduced in China: the division of revenue and the allocation of fiscal authority. While the former has been discussed relatively thoroughly along with the establishment of the tax sharing system, the latter has been left untouched. With the deepening of China's public finance institutional reform, the establishment of a system for the allocation of fiscal authority is an urgent issue. Most existing models include only two levels of government; however, China's government structure is multi-leveled. It is important to include the central, provincial, and local governments in a three-level delegation model, which is more suitable for delegation as practiced in China. Because the central government always has absolute priority in allocating authority, while the provincial government can only reallocate those authorities delegated by the central, it is nature to embed these two delegation practices into a Stackelberg framework, in which the central government is the leader and the provincial government is the follower, with the local government as a passive participant that simply accepts the authority delegated to it from above. According to the similarity between the structure of China's government system and that of the Aghion & Tirole (1997) model, which distinguishes formal and real authority, we assume that each government formulates their delegation problem in the Aghion-Tirole fashion. The delegation rules for the provincial and central governments can be solved for successively, giving the complete allocation of all powers between the three levels of government. The exact form of the scheme is determined by the specific benefits and congruence parameters on each authority, from which it is natural to derive the strategic responses between levels of government, including behaviors such as cooperation, competition, and shirking. For illustrative purposes, we give a possible scheme of allocations that contains 64 combinations of 6 congruence parameters, each determines an allocation that is described with the government with formal authority and its corresponding behavior.
For theoretical completeness, the model is extended to include a transaction cost to institutional changes and the bounded rationality of the participants. This lays the foundation for the existence of the authority structures that are widely observed in practice. Based on these theoretic results, there are four aspects for policy application. First, in addition to the interest importance theory that is widely used in policy formulation, interest congruence theory can also be applied to reduce the existing large amount of common authority, which is considered to be the origin of the current chaos in authority allocation. Generally, a government need not implement an authority directly that it considers important if another government is willing to do so and their interests are congruent. For example, for those authorities that the provincial or local governments are highly incentivized to implement and for which the central government's interest can be represented by them, it is more efficient to fully delegate. Second, the three-level structure of the model treats the provincial government's problem systematically rather than simply duplicating the central government's delegation scheme. This leads to more accurate and informative policymaking. Third, distinguishing between real and formal authority is of great importance to make clear that one should match spending responsibility with formal authority, rather than with real authority. Finally, it is argued that the legalization of formal authority combined with the flexible allocation of real authority can serve as the fundamental building block of a stable allocation of fiscal authority. The idea is that real authority is much more flexible and so can play the role of a stabilizer that makes the system more stable, similar to the role that intergovernmental transfers play in the tax sharing system. There are two directions for further research based on this paper. First, starting from a selective set of authorities, a dataset of their allocation history could be used to verify to what extent the current model applies to reality and to see what modifications should be added to the model. Second, embedding the Aghion & Tirole (1997) structure into a dynamic setting would be a challenging but meaningful task.
Keywords： Fiscal Authority; Delegation; Government Behavior; Contract Theory
JEL Classification： D73, D86, H77

Summary： The report of the 19th National Congress of the Communist Party of China (CPC) emphasizes that development inequality is detrimental to the people's ongoing demand for a better life. There is no doubt that governmental transfers play an important role in realizing balanced income growth for all different groups of people. In this study, we systematically evaluate the impact of governmental transfers on reducing poverty with targeted measures. In addition, we examine the income redistribution effect of the transfer system. Our study contributes to a better implementation of China's fiscal policy reform.
The income redistribution effect of governmental transfers has attracted considerable academic interest. Studies have proved that governmental transfers are effective at reducing poverty. Far fewer studies have investigated the redistribution effect of private transfers. As such, we make three contributions to the literature. First, we are among the first studies to test the impact of China's transfer system on reducing income inequality from multiple dimensions. Three kinds of transfers are considered: governmental transfers, corporate transfers, and individual transfers. Second, we use an empirical approach to measure the pro-poorness of these transfers and decompose the contribution of each kind of transfer to improving income redistribution. Third, we add new micro evidence to the literature on income redistribution and transfers.
Empirically, we first use an approach that measures the pro-poorness of different kinds of transfers. We then use this measure to evaluate the benefit incidence of three kinds of transfers: governmental transfers, transfers from firms and social organizations, and individual transfers. Then, we calculate the contribution of each transfer to reductions in income inequality. Finally, we examine how effective transfers are at reducing poverty using targeted measures.
Our data come from “China's Health and Nutrition Survey” (CHNS). The database covers nine representative provinces (i.e., Liaoning, Heilongjiang, Jiangsu, Shandong, Henan, Hubei, Hunan, Guangxi, and Guizhou) that differ greatly from each other in terms of their geographic characteristics, public resources, and health conditions. Until recently, the survey also covered three provincial-level cities: Beijing, Shanghai and Chongqing. The database includes information on various household variables, such as income sources, property status, and survey date. To make our sample more comparable, we deflate currency indicators by the consumption price level. Furthermore, we divide household total income between family members. Then, we categorize households as poverty households based on two criteria: whether the household income per capita is higher than the average sample value and whether the household income per capita is above the national poverty line.
We have five basic findings. First, transfers, either from the government, corporations, or individuals, are pro-poor. China's transfer system is effective in reducing poverty according to targeted measures. Second, governmental transfers are the most pro-poor, followed by individual transfers, with corporate transfers coming last. Third, the economic magnitude of the transfer effect in reducing income inequality is small. On average, the Gini coefficient decreases by 2.4% as total transfers increase by 1%, accounting for 5% of the total Gini coefficient. Fourth, judging from the marginal income redistribution effect, the Gini coefficient decreases by 0.0248% (0.0123%) if governmental transfers (individual transfers) increase by 1%. However, the Gini coefficient decreases by 0.0002% if corporate transfers increase by 1%. Fifth, the redistribution effect of transfers is heterogeneous across different transfers items and over time.
Our study suggests that the effect of China's current transfer system in reducing income inequality is limited. To enhance the efficiency of the transfer system, we should make poverty-reduction funds more targeted. The government should also find ways to encourage the private sector to participate in redistribution activities.
Keywords： Multi-transfer Payment System; Pro-poor Index; Income Redistribution; Equivalent Household Scale
JEL Classification： H23, H31, J32

Summary： R&D tax incentives are not only an important policy instrument for implementing an innovation-driven strategy and making China an innovative nation, but also the gripper for reforming the current tax code to reduce firms' tax burdens and real economic enterprise costs. Many studies question whether R&D tax incentives can act as a sustainable incentive for enterprises. This paper considers China's R&D tax reduction and exemption policies, carrying out a basic analysis of the facts and assessing the sustainability of tax reductions and exemptions using micro-enterprise data.
R&D tax reduction and exemption policies in China can be divided into two categories. One includes tax reductions and exemptions determined by specific enterprise qualifications (including high and new technology enterprises, integrated circuit enterprises, and animation enterprises), hereinafter referred to as qualification determined tax reductions and exemptions; the other involves R&D expenditure preferential policies that review specific R&D projects (such as some new product or technology for enterprises), hereinafter referred to as R&D project reviewed tax reductions and exemptions. For qualification determined tax reductions and exemptions in China, enterprises must meet relevant conditions on the R&D human resource investment ratio, R&D expenditure ratio, new product (service) sales income ratio, independent intellectual property rights and results transformation, and enterprise growth (revenue scale growth and asset growth). Enterprises must also be determined to be eligible to enjoy various benefits and must meet the reduction and exemption conditions every year.
Using data from a tax reduction and exemption database covering the Twelfth Five-Year Plan in an eastern province and the regression results of a generalized Heckman selection effect model based on whether enterprises obtain tax relief and the reduction ratio variables, this paper proves that qualification determined reductions and exemptions primarily generate “selection” effect for enterprises. Compared with project reviewed reductions and exemptions, qualification determined reductions and exemptions require of enterprises a statistically significant higher requirement in terms of revenue scale and labor factor remuneration payments. The regression result of an instrumental variable method that integrates the endogenous treatment effect model of enterprise selection and tax incentive shows that the two effects work together in the denominator of a core threshold condition on revenue scale and generates a more significant revenue scale heterogeneity response, which has higher requirements for R&D investment, processes, and output in the next year and ultimately has a significant negative impact on whether enterprises continue to obtain reductions and exemptions. The revenue scale heterogeneity response to qualification determined reductions and exemptions limits the net profit margin during the same period; under the double constraints of proportional threshold conditions and annual R&D input requirements, the decrease in profitability weakens the likelihood enterprises will continue to meet the relief conditions in the next year. There is a flaw in the design of qualification determined tax reductions and exemptions.
This article makes two contributions. (1) This paper studies the sustainability of enterprise qualification determined R&D tax reductions and exemptions in China in an innovative way and uncovers the mechanisms by which the heterogeneous response of enterprise revenue scale affects sustainability. (2) The conclusions of this paper provide useful insights for improving the R&D tax policy and promoting the sustainable innovation.
In regard to policy implications, qualification determined R&D tax reductions and exemptions should take a comprehensive assessment of average R&D investment, processes, and output performance of enterprises over an inter-annual cycle, such as keeping pace with the validity period of the qualification or even over a longer period of time. The government should provide enterprises with tax reductions and exemptions sustainably during this term.
Keywords： Tax Reduction and Exemption; Qualification Determination; Sustainability; Endogenous Treatment Effect Model; Instrumental Variable Method
JEL Classification： H21, H25, H32

Summary： Currently, China's economy has stepped into a new normal status, wherein overcapacity poses a serious challenge in some industries, many zombie firms exist, and the supply of strategic emerging industries is insufficient. This makes supply-side structural reform imperative. How to effectively achieve the transformation and upgrading of the industrial structure is a major problem that remains to be solved. The modest scale and exit mechanism of industries are important issues for supply-side structural reforms. The key is to solve the coordination problem of the government and the market from the supply-side perspective. This requires the government to consider the role of the market in formulating policies and sets a higher bar for the accuracy and evaluation mechanism of the policies. However, our theoretically understanding of the synergistic effects between the government and the market in improving the industrial structure is limited and no study offers a theoretical and practical micro-mechanism for the exit behavior of firms. The theoretical framework and numerical analysis under this hybrid mechanism are important issues for ensuring that the macroeconomy is stable and that industrial policies are accurate.
This paper focuses on firms' optimal decision and the number of firms in the industry and discusses synergy between the government and the market. By allowing firms to exit, we build a dynamic equilibrium model based on real option game theory, extending the framework of Pindyck (2009) and Bustamante & Donangelo (2017). Firms can freely enter the industry by paying a sunk cost, while incumbent firms can pay another cost to exit when market conditions deteriorate. Without loss of generality, firms can produce any amount of a homogeneous product as they want at a constant marginal cost. We assume a Nash-Cournot competition structure for firms in the industry. The market demand curve shifts unpredictably and is regarded as market risk. All firms have idiosyncratic ongoing fixed costs and face the risk of failure.
The theoretical model in this paper provides the optimal strategies for firms' exit and entry decisions under various industrial structures, from monopoly to perfect competition. Based on the theoretical model, the following conclusions are drawn. (1) Market risk exacerbates the difficulty of firms' exit and entry decisions and can magnify the corresponding exit and entry costs. (2) The government's industrial policies should be formulated according to market conditions. When the market risk is high, it is more effective to adjust the market risk, especially in the short run. However, in the long run, adjusting exit and entry costs and firms' failure rate is relatively more effective. (3) Through Monte Carlo simulation, we solve for the time needed for industrial policies to take effect, the process of industrial evolution, and the endogenous mechanism underlying the industrial policies under specific conditions.
This paper contributes to the literature in the following ways. First, based on real option game theory, this paper includes the case of firms' optimal exit strategy when there are a small number of firms in the industry. This provides a unified theoretical framework of market equilibrium and industrial development including both exit and entry for both small and large number of firms. This is an extension of the relevant theoretical literature. Second, from the supply-side perspective, this paper explores deeply the roles of the government and the market and synergies between them in guiding the exit of surplus overcapacity and entry into strategic emerging industries. We also discuss how the government can formulate effective industrial policies depending on the market conditions. Therefore, we provide the theoretical and practical micro-mechanism for firms' exit and entry decisions, which offers a feasible way for implementing supply-side structural reform. Third, we examine the process of industrial evolution under specific conditions and the endogenous mechanism behind industrial policies, which provides the government with a tool to assess industrial policies intuitively and quantitatively and answers how to implement industrial policies more accurately. This paper gives a theoretical foundation for industrial policy formulation.
Keywords： Supply-side Structural Reform; Industrial Structure; Exit and Entry; Market Risk
JEL Classification： D21, D81

Summary： Under China's economy's new normal, innovation has become imperative for achieving high-quality development. In many speeches, President Xi Jinping has emphasized the need to implement an innovation-driven development strategy and proposed that “innovation is the first driving force for development”. The Chinese government regards the disposal of zombie firms as an important starting point for improving the quality of the supply side. Based on the reform background of deleveraging state-owned enterprises (SOEs), this paper studies how “zombie firms” (defined as insolvent firms which continue to operate due to continued access to financing at extremely low costs) influence the innovation outcomes of other firms, specifically by their distortion of credit allocation and product market competition, and provides empirical support for the current focus in China of seeking “high-quality development”.
Using firm-level data from the above-scale industrial firm dataset provided by the National Bureau of Statistics, this paper empirically tests the impact of zombie firms on the innovation outcomes of normal firms (i.e., non-zombie firms). The empirical results show that zombie firms significantly reduce the patent applications and total factor productivity (TFP) of normal firms. If the proportion of zombie firms in an industry increases by 1%, the total number of patent applications of normal firms decreases by 1%, the total number of invention patent applications decreases by 0.5%, and normal firms' TFP decreases by 2.4%. This effect is both statistically and economically significant. The crowding-out effect of zombie firms influences normal firms through multiple channels. More resource-constrained firms (non-SOEs) face greater distortions from zombie firms, as do firms with more external financial dependence and firms in more concentrated industries.
This paper uses the following steps to identify the crowding-out effect of zombie firms on the innovation of normal firms. (1) In the baseline model, we use firm-, industry-, and city-level control variables to control for the impact of a firm's own operating performance, industry development, and local economic conditions on corporate innovation and TFP. Because the main explanatory variable is the proportion of zombie firms at the industry level, all regression models control for industry fixed effects and standard errors are clustered at both the industry and year level. We also use year fixed effects to control for time trends. The results of the baseline model show that the total number of patent applications and the TFP of firms are significantly and negatively correlated with the proportion of zombie firms in their industry. (2) To deal with endogeneity problems such as omitted variables and reverse causality, we follow Tan et al. (2017) and use instrumental variable (IV) regressions to verify the empirical results of the benchmark model. (3) We check for heterogeneous effects based on the ownership of firms, the external financing dependence of the industry, and the degree of industry competition. Subsample regressions show that the crowding-out effect of zombie firms on the innovation of normal firms is more profound for non-SOEs, firms in industries with high external financing dependence, and firms in highly concentrated industries. This implies that zombie firms influence the innovation outcomes and the TFP of normal firms by distorting credit allocation and industry competition.
The paper makes the following contributions. First, by studying the structural problems of the resource misallocation caused by zombie firms, this paper shows that the disposal of zombie firms is critical to promoting innovation in China. This is of great policy importance. Second, this paper proposes a new industry perspective on how zombie firms affect the performance of normal firms. The literature usually focuses on the jurisdictional perspective and uses the proportion of zombie firms at the provincial level to study the credit misallocation caused by zombie firms (Tan et al., 2017; Li et al., 2018). Using a different angle, this paper finds that the crowding-out effects of zombie firms not only play a role through credit rationing at the jurisdictional level, but also through product market competition. This finding implies that the disposal of zombie firms is not a jurisdictional issue, but rather has nationwide implications in terms of promoting innovation. In summary, this paper illustrates the policy importance of disposing of zombie firms and sheds light on the current reforms aimed at promoting high-quality development in China.
Keywords： Zombie Firms; Corporate Innovation; Credit Misallocation; Product Market Competition; High-quality Development
JEL Classification： G30, H81, O30, D62

Summary： A decline in the labor share is occurring in many countries. The literature studies the factor distribution of income from the point of view of industrial structural changes. However, the theory of structural change has its limitations. For example, in recent years, China's labor share has not continued to decrease, instead increasing from 2004. The theory of structural change cannot explain this reversal in China's labor share.
We develop a two-sector model with an agricultural sector and a non-agricultural sector. This model provides insights into directed technical change by letting us explore the determinants of factor share changes and investigate the influences of directed technical change on the structural effect and industrial effect in factor share changes jointly. Using a normalized supply-side system, this paper combines data from three industries from 1978 to 2012 to estimate the directed technical change in each industry. Applying the decomposition framework, we analyze directed technical change's contribution to structural effects and industrial effects and explore the drivers of the change in the labor share.
The results show that (1) there are two forces, directed technological change and factor structure, that determine the industrial effect of the change in the labor share; the direction and extent of this effect depend on the elasticity of substitution between the two factors and a distribution parameter. At the same time, directed technical change across sectors, by influencing the relative technical efficiency of two factors, motivates factor mobility and reallocation between sectors, resulting in the transformation of the sectoral structure and generating the structural effect in the change in the labor share. However, there is a threshold for this impact. When directed technical change in the agricultural sector is less than the threshold, it has a positive influence on the structural effect; when directed technical change in the non-agricultural sector is greater than the threshold, it has a positive effect. (2) Directed technical change plays an important role in explaining the industrial effect and structural effect of the labor share change. Roughly one third to one half of the change in the labor share arises from directed technical change. (3) Directed technical change shows different features depending on the stage and industry. From 1996 to 2002, directed technical change affects the change in the labor share by the structural effect. In other periods, directed technical change plays a role mainly through the industrial effect. Directed technical change is responsible for 35.18% of the decline in the labor share from 1996 to 2002, which is dominated by the capital-biased technical change in secondary industries. Coordinating with industrial policy, different industries can change the direction of technical progress to select an appropriate technical change, promoting structural transformation and technology upgrading and restraining imbalances in the income distribution.
This paper makes two contributions to the literature. First, we develop a simple two-sector accounting framework with agriculture and non-agriculture sectors and decompose the changes in the labor share into the industrial effect and structural effect. This paper analyzes how directed technical change affects the marginal product of capital and labor factors asymmetrically, influencing the industrial effect of a change in factor shares directly. We investigate the effect of directed technical change on the technical efficiency of different factors across sectors, inducing the reallocation of factors between sectors to motivate changes in the industrial structure, which forms an indirect effect on the labor share. Our model is a useful framework that is particularly well suited for analyzing how the endogenous power of factor shares change. Second, using a normalized supply-side system, this paper estimates directed technical change in three industries and decomposes the industrial effect into the factor reallocation effect, the directed technical change effect, and the institutional change effect. We extend and enrich the structural effect by incorporating directed technical change and separate directed technical change and its coupling effect with factor reallocation from the structural effect. We assess the contribution of directed technical change to the changes in the labor share in different periods in China from the two perspectives of the industrial effect and structural effect. This paper provides an explanation for changes in China's labor share and provides theoretical and empirical evidence for changes in the factor distribution of income.
Keywords： Biased Technical Change; Industrial Structure; Labor Share; Factor Distribution of Income
JEL Classification： O14, D33, L16

Summary： Industrial upgrading has become increasingly more important as China's economy has shifted from high-speed growth to the new normal. Practices related to industrial upgrading have had a profound impact on China's economy and the society over the years and have caused major changes in the income distribution as reflected in the long-term and gradual decline of labor's share of income. In theory, the relationship between industrial upgrading and labor income share is ambiguous. Long-term experience suggests that industrial upgrading is mainly due to biased technological improvement driven by a deepening of physical capital which can lead to declines in the labor income share by “squeezing out” labor, especially unskilled labor, but can also strengthen the dependence on skilled labor and lead to an increase in the labor income share through changes in the skill structure of labor income.
This paper empirically evaluates the effect of industrial upgrading on the labor income share across the prefectures of China from 1998 to 2007. With a focus on the industrial sector, this paper constructs a new measure for prefecture-level industrial upgrading centering on the idea of technological progress. We propose a novel predictor for each prefecture's industrial upgrading based on information on each prefecture's initial industrial structure in the first year of the sample period and the nationwide trend of industrial growth for each industry. By using this predictor as a synthesized instrumental variable, we can more accurately identify the effect of industrial upgrading on the labor income share in China. We find that industrial upgrading has significantly increased the labor income share across prefectures in China. In terms of the mechanism, the increase is a result of the joint effect of inter-industry and within-industry resource reallocation. Additional analysis from the perspective of different production factors shows that industrial upgrading enhances the demand for and dependence on skilled labor and human capital and this change in the skill structure of labor income leads to the increase in the share of labor income in total value added by raising the relative wage, the employment share, and the income of skilled labor.
One policy implication of this is that the relationship between industrial upgrading, biased technological improvement, and income distribution should be properly dealt with when accelerating industrial upgrading. To avoid “squeezing out” labor as a result of technological progress, we should gradually move away from the traditional way of industrial upgrading through capital accumulation, instead emphasizing the connection between capital and labor and implementing industrial upgrading at a higher level driven by human capital and innovation. It is also necessary to improve the skills and qualities of the labor force to meet the requirements of and become a long-term driving force for industrial upgrading at a higher level without reducing the labor income share.
The contributions of this paper are as follows. First, this paper innovatively analyzes the mechanisms through which industrial upgrading affects the labor income share from the perspective of changes in the skill structure of labor income. Second, this paper develops a new measure of industrial upgrading using skill sophistication for detailed industry classification. This measure better represents the true meaning of modern industrial upgrading as it emphasizes technological progress. Third, to the best of our knowledge, this paper is the first to construct a synthesized instrumental variable for endogenous industrial upgrading at the prefecture level based on the idea of “Bartik instruments” and provides a technical reference for further research on accurately evaluating the effects of industrial upgrading.
Keywords： Industrial Upgrading; Labor Income Share; Optimization of Industrial Structure; Skill Structure of Labor Income
JEL Classification： D33, O33, J31

Summary： China, as a transitional economy, faces a high level of market segmentation among administrative regions, which lowers the efficiency of resource allocation and the total factor productivity (TFP) rate. The literature has focused on the negative effects of local protectionism and administrative division on the formation of market integration in the economic growth process. However, considering that administrative districts such as prefectures usually overlap with cultural regions in China, the effects of local protectionism and administrative division on market segmentation may be overestimated because cultural diversity may also be negatively related to market integration. More importantly, diversity of dialect tends to increase the cost of communication, making it a barrier to labor migration and decreasing the level of generalized trustamong people. As a result, it may have adverse effects on the market integration process.
Recently, more empirical works have explored the relationship between cultural diversity, which they usually measure as the number of dialects and amount of economic growth in the region, and have generally shown consistent results. For example, Xu et al. (2015) shows that dialect diversity has adverse effects on GDP per capita. Zhao & Lin (2017) find that dialect diversity and not genetic differences can explain regional disparities in China to a large extent. Similarly, Liu et al. (2017) indicates that dialect diversity has adverse effects on the productivity of neighboring counties. Nevertheless, to the best of our knowledge, few works reveal the impact of dialect diversity on the level of market segmentation among regions in China.
Taking a somewhat different approach, we directly focus on the effects of dialect diversity on market segmentation. Empirically, to estimate the causal effects of dialect diversity on market segmentation, we randomly build the synthetic metropolitan area as the fundamental analysis unit in which a core prefecture borders several other governorates. Consequently, within the artificial metropolitan area, the number of dialects and amount of market segmentation can be measured. Given that the synthetic metropolitan area does not belong to any particular administrative district, the differences in market segmentation between synthetic metropolitan areas are attributed to variations in dialect and other economic or geographic factors rather than the administrative division between areas.
Based on the method developed by Gui et al. (2006), this paper uses the seven categories of retail prices in prefectures in 2016 to calculate the market segmentation index of each synthetic metropolitan area, which it takes as the dependent variable. Furthermore, following Xu et al. (2015), this paper constructs a dialect diversity index for each synthetic metropolitan area, which it takes as the key independent variable. The results show that diversity of dialect is a critical factor in lowering the amount of market integration in China. The findings are robust to various checks. Furthermore, this paper takes the number of local theatrical genres as an instrumental variable of dialect diversity. The instrumented estimations show that a one-dialect increase in the synthetic metropolitan area increases the amount of market segmentation by about 2.42%. The amount of market segmentation in the synthetic metropolitan area, which has the average number of dialects, is 8.23% higher than in areas with only one dialect. The empirical results imply that it is essential to weaken local protectionism and enhance cultural integration between regions to decrease market segmentation.
This paper makes three contributions to the literature. First, it enriches the broad interpretations of the causes of market segmentation from the dialect diversity viewpoint. Second, it directly estimates the effects of dialect diversity on market segmentation and determines the long-term effects of cultural factors (Alesina & Giuliano, 2015), providing new cultural economics evidence from China. Third, this paper contributes to the literature analyzing the underlying mechanisms behind dialect diversity and growth, suggesting that market segmentation is another mechanism used to understand this causal relationship.
Keywords： Diversity of Dialect; Market Integration; Synthetic Metropolitan Area
JEL Classification： Z13, O10, R58

Summary： Against the background of the slow progression of WTO multilateral negotiations, bilateral and regional Free Trade Agreements (FTAs) have developed rapidly in recent years. To increase the benefits it gets from FTAs, China must implement high-level trade and investment liberalization and facilitation policies, improve the convenience for firms using FTAs, and include firms in the negotiation and construction of FTAs. This paper incorporates firm heterogeneity to explain firms' strategic choice of FTAs within the theoretical framework of the heterogeneous firm trade model and discusses the factors influencing FTA use and the underlying mechanisms. This paper helps tap the potential of the agreements and improves the utilization rate of FTAs by analyzing firms that have made use of FTAs.
The literature assessing the effects of FTA implementation focus on the trade boundary effects brought by lower tariff levels, such as trade creation, trade transfer (Viner, 1950), and trade deflection (Meade, 1955). Although the magnitudes of these three effects are uncertain, FTAs have positively promoted trade between member states on average (Urata & Kiyota, 2005; Baier & Bergstrand, 2007; Magee, 2008). However, these studies ignore that not all firms make use of the preferential policies of FTAs according to survey data provided by Zhang et al. (2010), Takahashi & Urata (2010), and Kohpaiboon (2008). Some studies using the gravity model and looking at “marginal firms” to measure the costs of using FTAs find that the utilization rates of FTAs are not as high as one would expect based on the costs.
This paper establishes a theoretical framework that incorporates firm heterogeneity to analyze FTA utilization rates and studies the impact of costs to using FTAs on whether firms use FTAs for exports. The theoretical analysis shows that firms with lower productivity export directly; only those with high productivity use FTAs to export. The actual FTA utilization rate by Chinese firms is not as high as expected, as can be seen when measuring country and industry differences in FTA utilization. This shows that most firms do not use the preferential tariff rate under the FTA clauses when exporting, which restricts the FTA trade creation and welfare effects.
Taking the China-Switzerland FTA as an example, our study uses micro data on Chinese firms' exports to Switzerland from 2014 to 2016 to analyze the factors affecting the use of the FTA and finds that a large tax rate difference is conducive to improving the utilization rate and that rules of origin restrictions have a significant inhibitory effect on the use of the FTA. The cost of using the Sino-Swiss FTA is also systematically measured. The results show that the cost of using the FTA for Chinese exports to Switzerland was significantly lower in 2015 than in 2014. In 2016, the ratio of the cost of using the FTA to total exports was only 2.02%. We also find that the cost of using FTAs is higher in industries with restricted rules of origin.
The results of this paper have both practical significance and policy implications. The government should increase the use of FTAs and help firms to take advantage of the signed FTAs in three ways. First, the relevant departments should actively reduce the cost of using FTAs by updating policy information on the FTAs in a timely fashion, simplifying the procedures for the processing of certificates of origin, and tracking the actual obstacles and specific needs of firms, especially of SMEs. Second, they should target the utilization rate of the agreement, investigate the current conditions of the relevant industries through field research, and then adjust the applicable rules of origin on average and guide and support firms in key industries in taking advantage of FTAs. Third, they should strengthen the coordination of rules of origin in countries via negotiations of FTA rules in cases of the “spaghetti bowl” effect increasing transaction costs for firms operating in the global supply chain. The government should also assist SMEs in using FTAs, allow more companies to participate in the international negotiation and formulation of economic and trade rules, and work hard to include more voices in international trade.
Keywords： Heterogeneous Firms; Free Trade Agreement; Utilization Rate; Utilization Cost
JEL Classification： F10, O10

Summary： As China's energy resource strategic support base, resource-based cities play an important role in the sustainable development of the national economy. However, since the 1980s, increased resource exploitation has caused many resource-based cities to grow more slowly or to start to decline. There have even been cases of cities “dying” due to mineral exhaustion. Declines due to resource exhaustion heavily undermine the sustainable development of these cities. Consequently, the country and all sectors of society have begun to pay attention to these cities' transformation. Industrial transformation is the key to saving resource-based cities; therefore, it is necessary to study the industrial transformation of these cities in China. To do this, one must study environmental regulations, resource endowments, and urban industrial transformation.
To analyze the influence of environmental regulations and resource endowments on industrial transformation, this paper looks at 282 prefecture-level cities in China using the China Urban Statistical Yearbook, China Regional Economic Statistical Yearbook, and the Statistical Yearbook for each province. We collect panel data for 282 prefecture-level cities from 2005 to 2016 and divide the 282 cities into resource-based and non-resource-based cities. By looking at the variables of resource endowment for resource-based cities and dividing industrial transformation into the rationalization and optimization of the industrial structure, this paper discusses the threshold character and the nonlinear impacts of environmental regulations and resource endowments on industrial transformation using the panel threshold regression method.
There are three main results. First, for resource-based cities and non-resource-based cities, environmental regulations and resource endowments both exhibit significant nonlinear threshold effects on the rationalization and optimization of the industrial structure. Second, environmental regulations, viewed as a threshold variable, favorably impact the rationalization and optimization of the industrial structure of resource-based cities and non-resource-based cities. Third, resource endowments, viewed as a threshold variable, do not have a prominent impact on non-resource-based cities. However, for resource-based cities, a higher resource endowment level has a negative impact on the rationalization and optimization of the industrial structure. In summary, when the resource endowment factor is not considered, environmental regulation is beneficial to the rationalization and optimization of the industrial structure and environmental regulation can be used to promote industrial transformation. The resource endowment variable has a negative impact on the industrial transformation of China's resource-based industries.
This paper makes four main innovations and contributions. First, we analyze deeply the impact of environmental regulation on industrial transformation for 115 resource-based cities in China; to make our conclusions more meaningful, we do a comparative analysis using 167 non-resource-based cities as the control group. Second, we use panel data on 282 prefecture-level cities from 2005 to 2016 and various econometric methods to analyze the linear and nonlinear relationships between the variables. Third, we analyze empirically whether there are threshold effects for environmental regulations and resource endowments on industrial transformation. When threshold effects exist, we estimate the threshold value and the nonlinear quantitative relationship between the variables. Fourth, our conclusions provide suggestions to the government for how to make strategies for environmental regulation and industrial transformation.
Keywords： Environmental Regulation; Industrial Transformation; Resource Endowment; Panel Threshold Regression
JEL Classification： F06, F09