Geographical influences on Chinese inventory: an exploratory study

We ask whether, in China, geographic location has explanatory power for firms' inventory turn, and why. To do this, we undertake a variance component analysis (VCA) of firm-level inventory turn, using a panel dataset of 1,531 unique Chinese firms spanning 1999-2008. Our identification arises from the fact that many locations have multiple firms and some firms have multiple locations. We find that city and province effects explain 18.4% and 6.3% of the variation in inventory turn respectively, constituting the most important effects after firm effects (50.0%) and ahead of year and industry effects. To understand why, we use seemingly unrelated regressions (SUR) to identify six city-specific effects that explain inventory turn. We then check how these effects impact inventory turn, by estimating how the effects-turn relationship is mediated by known drivers of inventory turn such as gross margin and lead time. For example, we find that distance from Beijing is associated with higher inventory turn via lower gross margins.