Ding Lu: This paper scrutinizes the effects of state-led investment on economic efficiency in China at the microeconomic level. Since the early 1980s, China has achieved extraordinary success in economic development. A crucial feature of this developmental path is a proactive role played by the government. As observed by Lin (2012, 2013), while pursuing reforms to build a well-functioning market economy, the Chinese government has facilitated the development and upgrading of industries according to the economy's dynamic comparative advantages over years. The key elements of the government's proactive role include: (a) compensating for externalities created by pioneer firms in the process of industrial upgrading; (b) coordinating the desirable investments and improvements in soft and hard infrastructure; and (c) liberalizing entry into sectors in which the country has comparative advantages but at the same time providing some transitory supports and protections to unviable firms to maintain (social) stability....

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