Schumpeterian creative destruction and the growth of Chinese enterprises

This paper simulates Schumpeterian Creative Destruction to study the potential impact of bankruptcy on Chinese economic growth. When the least efficient firms in each period are shut down, technological progress occurs by selection, yet a portion of the economy's productive potential is destroyed. As a result, industries without shutdown, such as those found in China's socialist economy, attain faster initial growth rates. Upon reaching maturity, however, these industries are outperformed by those with shutdown. The relative performance of socialist versus market industries depends, of course, on many factors. These include the number of firms closed, the dispersion of technology, depreciation and savings rates, the degree of diminishing returns, the method of allocating investment, and the scrap value of existing capital stock. The effect of these factors is estimated with a Monte Carlo response function. Creative Destruction can help explain the high growth of China's rural township and village enterprises, as compared to more mature state-owned enterprises. Immature industries grow faster because relatively inefficient firms remain small. In mature industries, however, inefficient firms may be quite large due to past performance, and diminishing returns to investment increase the relative importance of technological progress. If rural enterprises remain socialist enterprises protected from shutdown, growth will eventually slow as well.