Inventory Management in China: Evidence from Micro Data

Abstract

Inventory management has become a favorite topic in the literature. However, research focusing on inventory performance and management in China is quite limited. A good understanding of inventory control would provide valuable information about the mechanism through which a firm determines its target inventory level and adjusts the inventory volume. Moreover, this study also contributes to examine inventory management improvement and its implement in developing country. This research uses a large sample of firm-level panel data from China to study inventory management and performance from three aspects.

First, using a variant of error-correction model, we empirically study the adjustment pattern of inventory and the effects of certain determinants on firms’ target inventory level with emphasis on industry heterogeneity over the period 2000-2009. We find strong evidence indicating a partial adjustment mechanism in short-run and the speeds of adjustment are various among different industries. From a long-run perspective, sales, ownership structure, political affiliation and managerial fixed cost are detected to be significant indicators of target inventory level.

Second, we employ an asymmetric error-correction model to study the adjustment mechanism of inventory in different macro business regimes. We find that an asymmetric adjustment mechanism could be commonly claimed in short-run: firms tend to be more sensitive when they confront negative demand shocks. However, the indicators of target inventory level work symmetrically regardless of external business environment.

Last, we test whether there is a link between innovation and inventory reduction. We find that total factor productivity (TFP) is a better indicator of innovation, and higher TFP contributes to a lower inventory volume. Moreover, when allowing the asymmetric adjustment mechanism, the impact of TPF is symmetric between the upswing and downswing of business cycle, which means the benefits of innovations are lasting and cannot be discharged by adverse economic environments.