Science Research Management

Science Research Management ›› 2021, Vol. 42 ›› Issue (3): 46-60.

Previous Articles     Next Articles

Government-enterprise relationship and excess capacity: A study from the micro perspective of Chinese manufacturing firms

Wang Tao1, Yan Jianguo1, Wang Kui2   

  1. 1. School of Economics and Management, Wuhan University, Wuhan 430070, Hubei, China;
    2. School of Management, Jinan University, Guangzhou 510632, Guangdong, China
  • Received:2018-06-05 Revised:2018-11-13 Online:2021-03-20 Published:2021-03-19

PDF

59

Abstract:    The challenge of excess capacity of Chinese manufacturing firms has long been a hot topic in economic and management research. Prior literature on the causes of excess capacity mainly focuses on factors at macro level. The first stream of literature demonstrates excess capacity can be viewed as a proactively strategic initiative aimed at deterring competitors′ market enter or a strategic reserve in order to deal with probable demand increase in the future. The second stream of literature focuses on the industry factors. For example, some researchers argue that the prevalent excess capacity for Chinese manufacturing firms can be attributed to decentralized investment decisions under incomplete information. As a developing country, Chinese firms often share a consensus about the technology development path that has been verified by developed countries, which results in a wave phenomenon in the firms′ investments and excess capacity in the industry. The third stream of literature focuses on factors of government. For example, some researchers suggest the excess capacity of Chinese manufacturing firms can be partially led by government intervention. Although these studies provide valuable insights for our understanding of the cause of excess capacity in Chinese manufacturing firms, the micro mechanism of firms′ excess capacity at the firm level received little empirical attention. 
   In this paper, we focus on how the interaction between firms and local government affects the capacity utilization rate at the firm level. Specially, we focus on the role of firms′ government-enterprise relationship in determining their rate of capacity utilization. There are two reasons why we pay attention to the government-enterprise relationship. The first reason lies in the importance of the government-enterprise relationship in influencing firms′ development and growth. The second reason is the conflict theoretical predictions in extant literature. Especially, some literature believes government-enterprise relationship can provide some important information and resource that can guide firms′ capacity adjustments and enhance product competitiveness, which thus may increase the capacity utilization rate. Others, however, argue that the government-enterprise relationship can limit firms′ capacity adjustments and compel firms to overinvestment as a reciprocate for government, which thus may reduce firms′ capacity utilization rate. Given these two reasons, we believe that it is worthful to investigate how a firm′s government-enterprise relationship affects its capacity utilization rate.
   To address the above question, we integrate the resource-based view (RBV) and institution theory to uncover two potential mechanisms that a firm′s government-enterprise relationship affects its capacity utilization rate. Following the logic of RBV, the government-enterprise relationship, as an important and valuable resource, can increase capacity utilization rate through providing important information about aggregate investment and demand change in the future, as well as other resources that are necessary to improve product competitiveness. On the other hand, following the logic of institution theory, the government-enterprise relationship can also reduce capacity utilization rate through improving institution press to stabilize growth and promote employment. Given the existence of two countervailing forces, we predict there is a U-shaped relationship between the strength of the government-enterprise relationship and capacity utilization rate. Using the data of the World Bank China-enterprise survey (2002-2004), we supported our prediction that there is here is a U-shaped relationship between the strength of the government-enterprise relationship and capacity utilization rate. Moreover, we further found that for firms located in regions where the relative economic growth rate is at a high level, this U-shaped relationship will be weaker due to the decline of institution press, compared with firms located in regions where the relative economic growth rate is at a low level. In addition, we also found the inner corporation governance (i.e., the board system arrangements) can weaken the dark side of the government-enterprise relationship, especially for firms with a low ownership concentration. The theoretical development and empirical findings of this study enrich the researches about the unique causes and mechanism of the excess capacity of Chinese enterprises, and have some important implications for enterprise managers as well as economic policymakers.

Key words: excess capacity, capacity utilization rate, government- enterprise relationship, resource-based view, institution theory