The effect of scale on the response to reform by Chinese state-owned construction units

Using firm-level data on large and medium state-owned construction units, a production function approach evaluates the effect of scale on the response of Chinese state enterprises to reform. Large state units have greater economies of scale, but are less productive and less input price efficient as investment increases in nonproductive fixed assets. Large unit profits are declining fastest, and a comparison of coastal, interior, and ministry-level units contradicts the hypothesis that competition is the primary source of this decline. Instead, falling profits are explained by the increased autonomy which allows these units to be more inefficient. (C) 1997 Elsevier Science B.V.