SOEs, Invisible Subsidy and Market Segmentation: Mechanism III

The market segmentation between regions in China has been a thorny problem for long, encroaching the potential benefits from labor division and market integration. What factors have led to China’s market segmentation, how to interpret the time and space differences of market segmentation? This chapter attempts to answer this question from the perspective of hidden subsidies of state-owned enterprises (SOEs). In the process of economic transformation, market segmentation plays the role of a kind of hidden subsidy to SOEs, the state-owned share of a region determines the extent of implicit subsidies, and thus determines the degree of market segmentation. This finding fits with the time and space differences of market segmentation. Using the Chinese provincial panel data, empirical analysis shows that the hypothesis is well confirmed. The findings further enrich the understanding of SOEs’ efficiency loss and market segmentation. From this perspective, changes in ownership structure will not only help improve efficiency, but also can reduce market segmentation, leading to market integration.