Effects of decentralization on firm performance: Evidence from Chinese county-level quasi-experiments

Abstract

How does decentralization affect enterprises at a microeconomic level? While many studies have identified decentralization's implications for macroeconomic outcomes, little is known about its impact on firms. This study applies county-level quasi-experiments of decentralization reforms in China to investigate the impact of decentralization on firm performance and its variance by type of decentralization and firm. Using firm-level data from 2003 to 2013, this study finds that administrative reform significantly improves firm performance by reducing costs and increasing profits. When implemented alone, however, fiscal reform has only an auxiliary effect and increases firm debt; the two reforms are complementary. Moreover, administrative reform has the greatest positive impact on private firms, with a smaller effect on foreign firms and a negative effect on state firms, due to economic needs. Fiscal reform has a greater negative impact on SOEs (state-owned enterprises) than on non-SOEs due to political closeness.