State-owned enterprise presence: Local spillovers

How can the state sector affect nonstate firms? The state sector can cause factor scarcity by occupying disproportionately abundant resources in a relatively closed economy. Frictional regional factor markets and sizeable geographical variations in the state sector make China ideal for studying this factor supply channel. We find that in cities with a strong presence of state-owned enterprises (SOEs), non-SOEs grow more slowly, especially in capital growth. This is more pronounced among financially constrained firms, inducing capital misallocation. Moreover, relative factor scarcity is compensated by higher productivity growth, especially among low-productivity firms. These results imply broad spillover effects of the state sector. •Local SOE presence can reduce available resources for local non-SOEs in a relatively fixed factor environment.•The harmful effect on non-SOEs' capital growth is more prominent than employment growth.•The adverse capital growth effect is notably more substantial in more financially constrained firms.•Adverse factor growth effect is compensated by endogenous positive productivity response.