The Formation Mechanism Of Overcapacity In Micro Sense Of China

In recent years, the problem of overcapacity in some industries is an important issue in the process of China’s economic development. Concerning the reasons for the formation of excess capacity, academics have been trying to explain it from different aspects. Foreign scholars study about this issue from the principal-agent problem, the presence of asymmetric information, the incomplete property rights and so on. While domestic scholars study this problem take more attention on macro level, but focus on micro level little. This paper tries to study the problem of overinvestment and overcapacity in aspect of micro enterprises, and tries to study the problem of overcapacity in a new perspective.By reading the large number of foreign and domestic literatures, I sort out these literatures from the concept of production capacity and excess capacity, manifestations of overcapacity and the reasons studied by foreign and domestic, etc. Then this paper reviews the history of overcapacity of China and analyzes the current characteristics. Our country has gone through triple overcapacity, the characteristics of it mainly expressed as cyclical, structural and cyclical and structural coexistence. I estimated capacity utilization from 1981 to 2013, the estimates indicates there is serious overcapacity in our country. I summarize characteristics of overcapacity in three aspects, overall severity and “rate scissors of capacity utilization and economic growth”; heavy industries performance outstanding; the national macro-control policies have little effect.In the analysis of micro-level, the paper analyzes the conflict between stakeholders at first. The research hypothesis managers can observe more information than shareholders; managers have a tendency to cover up investment profitability for their own interests. Well, in order to obtain accurate information and reduce this bias, shareholders restrict managers’ behavior through the compensation contract. However high-power incentive makes managers tend to overinvestment. This section discusses the possible factors which lead to overinvestment. Then the paper analyzes the Game between incumbent firm and potential firm. Expanding the productioncapacity is one of the core strategy for sustaining business growth and competitive advantage. This section explains why the incumbent firm overinvestment when there is a potential firm entering into the industry. At last I used the 13 non-financial industries of the 60 listed companies’ annual data(from 2009 to 2013) to estimate model, and verified the existence of the optimal level of investment.Based on the above analysis, I draw the following conclusions: The cost of effort increase, capital and financing costs increase, the project of expected returns reduce, riskier and stronger confidence can account for increasing managers’ investment tendency. According to the Game between incumbent firm and potential firm, the research shows that non-cooperation and cooperation where potential firm has the bargaining power, overinvestment may occur. And the relationship between investment and enterprise value is quadratic and nonlinear, this proves the existence of optimal level of investment. Based on the relevant analysis and conclusion, my policy suggestions as follows, establishing the early warning mechanisms; reducing the direct cost of financing and forming market-oriented financial resource allocation mechanism; improving the system of information release for industries; promoting business merger and recombination and improving the mechanism of exiting of firms.