Visible Hands and Invisible Hands on Attracting the Entrance of New Enterprises: Government Subsidies and Regional Productivity

The data of industrial enterprises provided by the China Industrial Enterprises Database shows that there is a negative correlation between the intensity of regional government subsidies and the number of new enterprises, which indicates that government subsidies are not effective in attracting the entrance of new enterprises. To explain this phenomenon, this paper establishes a two-region economic geographic model to study the effect of regional-level heterogeneous productivity on the intensity of government subsidies and enterprise entry decisions. Theoretical research shows that, compared with regions with low productivity, the subsidy intensity set by local governments in regions with higher productivity will be lower, but the number of enterprises entering will be greater. Based on 1998—2013 China Industrial Enterprise Database and the matched Chinese prefecture-level data, this paper empirically tests the theoretical hypothesis and found that the higher the regional enterprise productivity, the lower the regional government subsidy intensity, but the greater the number on untried enterprises. Further research shows that if regional productivity is not controlled, regional government subsidies will inhibit the amount of business entry; but if regional productivity and government subsidies are both controlled, the effect of government subsidies on enterprises is not significant. Therefore, market power represented by regional productivity rather than administrative power represented by government subsidies is the decisive factor in attracting enterprises to enter.