GDP Competition and Investment Allocation: Evidence from China

This study examines how macroeconomic performance competition is related to the investment allocation at firm level. We use different GDP competitions as proxies of dynamic macroeconomic condition. We find that the effect of GDP competition on fixed assets investment is significantly positive. Further, we find that adjacent-wide GDP competition is associated with more M&As and nationwide GDP competition is associated with less R&D investment in the high group of fixed assets investment. We also show that GDP competition contributes to increase overinvestment and lower underinvestment, and the GDP competition is more likely to affect the investment allocations of SOEs (State Owned Enterprises). Especially, our analyses find that the probability of promotion is lower for those provincial leaders driving firms to take more M&As to promote economic growth than investing heavily in fixed assets. We use alternative proxies to measure GDP competition and find similar results that support our inference. Our findings support the notion that GDP competition of governments distorts investment behavior and contributes to discovering and elucidating investment problems and dilemma faced by emerging economy.