Administrative decentralization and firm entry: evidence from China’s county power expansion reform

This paper investigates the causal impact of administrative decentralization on firm entry by exploiting China’s County Power Expansion (CPE) reform as a quasi-natural experiment. Using a difference-in-differences framework with Annual Surveys of Industrial Firms and county-level data from 1998–2013, we find that the CPE reform increases firm entry rates by 1.5% (10.6% relative to the mean) in treated counties, robust to alternative specifications, placebo tests, and machine learning estimators. Mechanism analysis reveals that decentralization incentivized county governments to compete for firms by lowering effective corporate tax rates, strategically reducing industrial land prices, and expanding infrastructure investment, thus reducing barriers to entry. Heterogeneity analysis indicates that the reform’s effects are more pronounced in counties with higher human capital endowments and lower levels of economic development. Additionally, new entrants post-reform are more likely to be unaffiliated, non-SOEs operating in low-pollution or low-technology industries. These findings elucidate how administrative decentralization fosters entrepreneurship, yet necessitate regulatory frameworks to mitigate fiscal distortions and calibrate growth with social welfare imperatives.