Market Structure, Resource Allocation, and Industry Productivity Growth: Firm-level Evidence from China's Steel Industry

Regional monopoly limits market reforms from improving cross-firm resource allocative efficiency, but little empirical evidence is available from developing countries. This paper provides rich evidence that regional monopoly may hinder the expansion of more productive firms, using the Chinese iron and steel sector as a case. Drawing on a comprehensive panel dataset comprising 11,136 iron and steel firms in China from 1998 to 2009, we demonstrate that market reforms in China's steel industry enhance competition at the national level, but do not effectively improve resource reallocation within provinces. Despite a decline in the market share of the top 10 largest steel enterprises from 80% to 50% between 1998 and 2009, resource reallocation only contributes to 14% of industry-level total factor productivity (TFP) growth, amounting to one-sixth of the contribution from within-firm productivity growth. Furthermore, the effects of resource reallocation within provinces are significantly lower compared to those observed between provinces, suggesting that market fragmentation or frictions hinder the expansion of more productive firms within the same province. These findings underscore the importance of eliminating regional monopoly for developing countries undergoing market reforms to enhance resource allocative efficiency.