Impact of Energy Market Distortions on the Productivity of Energy Enterprises in China.

• Author: Du, Weijian

1. INTRODUCTION

   Energy is an important instrument and driving force of economic development in modern society (Soukiazis et al., 2019, Teng et al., 2017). Given the extensively rising energy consumption, China has achieved rapid economic growth accompanied by increasingly tense energy balance pressure and severe environmental pollution (Alen, 2017, Song et al., 2019). The productivity of China's energy sector is also considered to be at a low level (Costa-Campi et al., 2019). Figure 1 shows that the productivity of China's power sector is in a relatively backward position. China's government has attached great importance to the development of the energy sector. (1) In 2017, the report of the 19th National Congress of the Communist Party of China clearly puts the promotion of structural reform and correct distortions in factor allocation forward to enhance productivity. (2) Furthermore, China Central Economic Work Conference(3) pointed out that "we should further promote the efficient and low-carbon transformation of energy production and consumption by improving the energy market mechanism and optimizing the energy market structure" in 2018. Evidently, the government has noted that correcting the factor market distortion to improve the total factor productivity (TFP) of energy sectors through energy market reform is an effective way to achieve sustainable development (Zhang and Adorn, 2018). We then ask the following questions: what kinds of distortions does China's energy market face? Do these distortions restrain the TFP improvement of energy enterprises in China? This study attempts to answer both questions.

   Theoretically, China faces two levels of energy factor market (EFM) distortions. First, given the intervention of local governments in transactions among state-owned energy enterprises, energy enterprises obtain low-cost funds or scarce production factors through political resources and rent-seeking behavior. Consequently, factor allocation among energy enterprises is distorted. Second, to gain negotiation advantage in the Political Promotion Championship, with GDP growth as the main assessment objective, local governments compete to adopt an administrative monopoly strategy. This action results in market segmentation that severely restricts the free flow of production factors and leads to the distortion of EFM in different regions (Yi et al., 2019). These distortions have seriously hindered the sustainable development of China's energy industry (Dai and Cheng, 2016). At present, a considerable amount of studies analyzes the distortion of energy as an essential productive factor (Segarra-Blasco and Jove-Llopis, 2019). However, most of these studies ignore the development characteristics of energy as an important industry in market distortion and TFP. Thus, effectively identifying the above two levels of EFM distortions, that is, misallocation among China's energy enterprises and regional energy market segmentation distortions, and then analyzing the impacts of these distortions on energy enterprises TFP are meaningful. Specifically, investigating these issues has an important significance in deepening the reform of China's energy market, correcting distortions, improving energy efficiency, and further promoting the transformation of energy industry.

   The contributions of this study are mainly reflected in three aspects. First, using the micro-data of energy enterprises in China, we measure the distorted degree of the factor market of energy enterprises from a capital perspective. Most studies investigate the efficiency of energy utilization regarding energy as a factor while ignoring the development characteristics of energy as an important industry (Penasco et al., 2019, Segarra-Blasco and Jove-Llopis, 2019). In addition, considering energy sector as a typical capital-intensive industry, energy product output is generally proportional to the scale of capital factor input. Therefore, the present study analyzes the market distortion faced by the energy industry from a capital perspective. Second, the present study reveals that energy market distortion significantly inhibits the promotion of enterprises' TFP, and this impact has been diminishing from theoretical and empirical studies. Compared with the previous model (Dai and Cheng, 2016, Hsieh and Klenow, 2009), the present study expands the application scope of the concept of factor distortion. Price distortions in China's energy market and different processes of market-oriented energy market in different regions exist. Compared with Brandt and Rawski (2019) which used structural decomposition method to investigate the aggregate TFP change, this study systematically investigates the TFP of energy enterprises from the micro-perspective. In addition, the present study analyzes the nonlinear relationship between the EFM distortion and the TFP. Third, this study examines the impact of energy market distortion on the entry and exit of energy enterprises with different productivity from the expansion margin perspective based on the dynamic decomposition of energy enterprise productivity. Our study highlights that the government should reduce inappropriate interventions, break the regional division pattern of energy market, and optimize the market competition environment of energy enterprises to achieve improvement in China. This process enriches the research perspective of this kind of literature. Given the widespread distortion of energy markets in developing countries, this research also proposes important implications for energy market reforms in other developing countries.

   The following is the structure of this study. The second section is the literature review. The third section describes the theoretical analysis. The fourth section explains the econometric model setting and index measurement. The fifth section presents the empirical results. The sixth section provides further discussion and the robustness test, are shown in the sixth section. The final section presents the conclusion and policy implications.

2. LITERATURE REVIEW

   In recent years, many studies have analyzed the relationship between factor market distortions and productivity (Hsieh and Klenow, 2009). Long-term distortions in the energy market, especially in the EFM, waste various energy production factors, thus leading to productivity loss in energy industry (Dimitropoulos and Yatchew, 2017). Tanaka and Managi (2013) found that compared with the privatization policy, the deregulation policy is effective in improving the distortion of the natural gas market and enhancing the productivity of natural gas enterprises. The effect of the policy may also be affected by enterprise scale and competitive environment. Wang and Wu (2014) noted that distortions in China's EFM restricted the energy industry's technological progress and productivity improvement. Senyonga and Bergland (2018) estimated an input distance function on the basis of Norwegian electricity utilities. They also studied the relationship between high-powered incentive regulations and the productivity of the regulated electricity distribution industry. The results show significant improvements in efficiency and productivity with competition and incentive regulation. Shao et al. (2019) found that the policy on energy intensity constraints can aggravate market distortion to a certain extent, which exhibits a negative effect on the TFP.

   The influence mechanism of EFM distortion on the TFP can be explained through three aspects. First, factor market distortion can cause a "lock-in effect" in the extensive growth model (Lin and Du, 2013). This distortion not only enables inefficient enterprises to survive but also reduces the motivation for technological research and development, thereby limiting productivity. Second, factor distortion easily causes rent-seeking and a "crowding-out effect" of innovation (Feng and Kun, 2013). Enterprises closely related to the government can obtain factors at a low cost, which reduces their willingness to improve productivity. Third, factor distortion is not conducive to the division of labor in regional production (Eder and Mahlberg, 2018). To maintain the sustained growth of the local economy, local governments impose price discrimination on energy enterprises in other regions, thereby restricting the free flow of factors hindering the productivity of energy companies.

   Existing research provides important references to understand energy market distortion and enterprises' TFP. However, certain aspects still require further study and discussion. First, macro-level research focuses on the overall effect of factor distortion on the TFP, without considering energy enterprises' heterogeneity. Second, significant differences in the order and characteristics of China's reform and opening up are observed. Will the change of the distortion degree of the regional EFM lead to a nonlinear relationship between the factor market distortion and TFP of energy enterprises? Finally, the entry and exit of enterprises are two of the most important characteristics of China's energy market, which may affect the change of the TFP in the energy industry. Without regard to the extensive margin, the loss of the TFP caused by factor market distortion may be underestimated. Therefore, to bridge the abovementioned research gaps, this study organizes the research framework according to the logic thread of three aspects. These aspects are the test of the overall impact of factor distortion on the TFP of energy enterprises, the test of the nonlinear relationship between energy distortion and TFP of energy enterprises, and the dynamic evolution of the entry and exit of energy enterprises caused by the EFM.

3. THEORETICAL MODEL

   China's energy market is a typical monopolistic competitive market, which is normally caused by relatively lagging market reforms, market distortions, and low-production efficiency. Thus, this section...