Market segmentation and industry overcapacity considering input resources and environmental costs through the lens of governmental intervention

Abstract

The problems with China’s regional industrial overcapacity are often influenced by local governments. This study constructs a framework that includes the resource and environmental costs to analyze overcapacity using the non-radial direction distance function and the price method to measure industrial capacity utilization and market segmentation in 29 provinces in China from 2002 to 2014. The empirical analysis of the spatial panel econometric model shows that (1) the industrial capacity utilization in China’s provinces has a ladder-type distribution with a gradual decrease from east to west and there is a severe overcapacity in the traditional heavy industry areas; (2) local government intervention has serious negative effects on regional industry utilization and factor market segmentation more significantly inhibits the utilization rate of regional industry than commodity market segmentation; (3) economic openness improves the utilization rate of industrial capacity while the internet penetration rate and regional environmental management investment have no significant impact; and(4) a higher degree of openness and active private economic development have a positive spatial spillover effect, while there is a significant negative spatial spillover effect from local government intervention and industrial structure sophistication. This paper includes the impact of resources and the environment in overcapacity evaluations, which should guide sustainable development in emerging economies.

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