State-owned enterprise presence: Local spillovers

How can the state sector affect nonstate firms? The state sector can cause factor scarcity by occupying disproportionately abundant resources in a relatively closed economy. Frictional regional factor markets and sizeable geographical variations in the state sector make China ideal for studying this factor supply channel. We find that in cities with a strong presence of stateowned enterprises (SOEs), non-SOEs grow more slowly, especially in capital growth. This is more pronounced among financially constrained firms, inducing capital misallocation. Moreover, relative factor scarcity is compensated by higher productivity growth, especially among lowproductivity firms. These results imply broad spillover effects of the state sector.