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A Study of the Mechanism of Government Intervention on Excess Capacity Through the Enterprise Overinvestment in China

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  • Biliang Hu
  • Zhiyi Liu
  • Sha Fan

Abstract

This article summarizes government publications focusing on excess capacity from the 1990s to 2016 and argues that the market-oriented principle needs to be established to deal with the long-standing excess capacity issues in China. Based on the specificity of the long-term excess capacity in China, this article puts forward the hypothesis: The excess capacity in China is derived from the enterprise’s overinvestment, and the government intervention is one of the main drivers of the problem. The intervention is actuated by the GDP-based government performance assessment through such means as offering privileges on land use, environmental ignorance, natural resource provision and financial support. This article (a) calculates capacity utilization of 30 manufacturing industries, (b) builds a ‘mediation effect model of overinvestment’, and (c) makes use of the industrial data, economic development data and capacity utilization from 1998 to 2017 to test the hypothesis. The result shows that government intervention indeed has a significant influence on excess capacity. The support for land use and the tolerance for environmental pollution are two of the most persuasive reasons. Therefore, the Chinese government needs to make greater efforts to deepen the market reforms, standardize and improve the factor market so as to accelerate innovation, and push for industrial upgrading.

Suggested Citation

  • Biliang Hu & Zhiyi Liu & Sha Fan, 2020. "A Study of the Mechanism of Government Intervention on Excess Capacity Through the Enterprise Overinvestment in China," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 12(2), pages 178-198, May.
    • Handle: RePEc:sae:emeeco:v:12:y:2020:i:2:p:178-198
    DOI: 10.1177/0974910120919347
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    References listed on IDEAS

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    1. Nelson, Randy A, 1989. "On the Measurement of Capacity Utilization," Journal of Industrial Economics, Wiley Blackwell, vol. 37(3), pages 273-286, March.
    2. J. M. Cassels, 1937. "Excess Capacity and Monopolistic Competition," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 51(3), pages 426-443.
    3. Berndt, Ernst R & Morrison, Catherine J, 1981. "Capacity Utilization Measures: Underlying Economic Theory and an Alternative Approach," American Economic Review, American Economic Association, vol. 71(2), pages 48-52, May.
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    Cited by:

    1. Jun Liu & Yu Qian & Huihong Chang & Jeffrey Yi-Lin Forrest, 2022. "The Impact of Technology Innovation on Enterprise Capacity Utilization—Evidence from China’s Yangtze River Economic Belt," Sustainability, MDPI, vol. 14(18), pages 1-17, September.
    2. Shi-Woei Lin & Januardi Januardi, 2023. "Two-period pricing and utilization decisions in a dual-channel service-only supply chain," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 31(2), pages 605-635, June.
    3. Bingqiang Li & Shan Wang & Nannan Dong & Jinzhi Li & Xi Li & He Yu, 2023. "Empirical Analysis of Subsidy Industrial Policy’s Effect on Export Innovation in the Chinese Manufacturing," SAGE Open, , vol. 13(4), pages 21582440231, November.

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