Entry Barriers and Growth: The Role of Endogenous Market Structure

Abstract

We use China's growth experience as a laboratory to study how reductions in administrative and regulatory entry barriers contribute to growth. We develop a model of endogenous productivity and market structure with heterogeneous firms and frictional entry and calibrate it to Chinese manufacturing firms. We show that the reduction of entry barriers brings about 1.05 percentage points of productivity growth over the 1990–2004 period, accounting for 18.3% of the productivity growth in the 2004–7 period. A decomposition exercise shows that entry mainly affects growth through promoting a more competitive market structure, which more than offsets the negative Schumpeterian effect.