Exit Barriers And Excess Capacity

Since the 1990s, China economy which had been shortage for a long time presented excessive competition. Large idleness of production equipment, surplus of products, Price wars serious, declining of profitability, and all of these phenomena characterized by excess capacity appear continuously. Scholars have done lots of theoretical and empirical studies for that. And most of these research results concerns on excess capacity in specific industries, markets or circumstances. The reasons to excess production capacity are complex and profound, while relative research results which probe formation mechanism of excess capacity are so rare, and have not formed a complete theory system until now.The main reasons to excess capacity are that the barriers to entry and exit of these industries are different. On the one hand, the imperfect of market mechanism and factor mobility mechanism weakens barriers to entry and causes lots of over-entry; On the other hand, china is still in economic transition period, poor labor market, industry associations, offices and other information service agencies cannot function effectively. Considering self-interest and social stability, local governments may prevent enterprises exiting. All these factors made the exit of excess capacity not smooth. However, the impact on excess capacity which caused by barriers to entry and exit is different. Lower barriers to entry increase the number of enterprises and makes excess capacity possible. But if the barriers to exit are not high, the superior can be selected and the inferior can be eliminated according to market competition law, which made the excess capacity transfer effectively. So exit barriers play a decisive role in excess capacity conformation. This article focuses on the mechanism of excess capacity from the point of exit barriers.Lacking freedom of exit means lacking the opportunity to correct mistakes and transfer resources from inefficient to efficient fields, thus make Pareto optimal impossible. Exit barriers causes a lot of resources (including financial, human, land and other production factors) being configured to inefficient fields, to produce non-market and less prospective products. Whether to the adjustment of industrial structure or to the absorption of excess capacity, or to the survival of the fittest, all these need a good exit mechanism. High exit barriers are the main reasons that lead to excess capacity and excessive competition. If the exit barriers can be reduced, industrial restructuring, corporation restructuring and labor mobility will be better, and the whole vitality of economy and efficiency will be significantly improved.In this paper, by reviewing existing theories at home and abroad, we combined theoretical analysis and empirical analysis, qualitative analysis and quantitative analysis to analyze iron and steel industry, to explore the formation mechanism of excess capacity, exit ways and means that affect firm exit. And then find relevant policy recommendations to digest and transfer the excess capacity.