External Demand Shocks, Digital Factor Inputs and Firm Capacity Utilization
PENG Shuijun, LI Zhixu, FANG Ying
School of Economics, Xiamen University; School of International Business, Shanghai University of International Business and Economics; Institute of International Trade and Economics, Guangdong University of Foreign Studies
Summary:
China’s development environment is currently undergoing profound and intricate transformations, characterized by the coexistence of external risks and challenges alongside internal adaptive pressures. As the largest exporter of manufactured goods in the world, China’s industrial capacity utilization rate is inevitably influenced by macroeconomic fluctuations and shifts in foreign demand, necessitating continuous adaption and transformation by firms in response to evolving external conditions. Looking ahead to the 15th Five-Year Plan period, external adverse factors such as uncertainties in the international political and economic landscape persist, coupled with insufficient demand from developed countries, are contributing to renewed risks of overcapacity accumulation. Effectively addressing constraints in external demand and internal pressures of overcapacity will be pivotal to China’s high-standard opening-up during the 15th Five-Year Plan period. This paper utilizes micro-level industrialfirm data and listed firm data from China to conduct an in-depth investigation into the following questions: First, how do external demand shocks affect firms’ capacity utilization, and what are the underlying mechanisms? Second, do the digital factor inputs help mitigate the negative effects of external shocks? What roles do different types of digital factor inputs play, and through what mechanisms do they operate? By examining these issues, this study aims to provide insights into mitigating external risks, developing the digital economy, and enhancing the resilience of industrial and supply chains. The findings indicate that negative external demand shocks exacerbate the risk of overcapacity, primarily due to a decline in the actual utilization of capacity and insufficient flexibility in adjusting total capacity, which reflects a lack of shock adaptability among firms. Further research reveals that the digital factor inputs can improve firms’ shock adaptability and alleviate the decline in capacity utilization caused by negative external demand shocks. On the one hand, digital transaction inputs assist exporting firms in finding new market outlets for their products when facing negative external demand shocks. On the other hand, the improvement of digital infrastructure accelerates the transformation process of firms in response to changes in the external market environment, including product switching and capacity adjustment. Based on the existing literature, the potential marginal contribution of this paper lies in the following aspects: In terms of the research perspective, it investigates the impact of external demand shocks on firms’ capacity utilization and analyzes the role of digital factor inputs in mitigating negative external demand shocks, thereby providing a novel perspective for reducing external risks. Regarding indicator measurement, this paper disentangles negative external demand shocks from the broader external demand shock indicators to capture demand contraction originating from downstream product-destination markets more precisely. Furthermore, drawing on the global value chain perspective, it incorporates multi-tiered industrial linkages to construct an indicator measuring the intensity of digital factor inputs. Based on the research findings of this paper, the following policy implications are proposed: First, continue to deepen the openness of goods and factor flows, further enhance the synergy between domestic and international markets, steadily expand institutional opening-up, align with high-standard international economic and trade rules, and establish a more comprehensive and advanced framework for international cooperation. Second, at the macro level, strengthen the supportive role of the domestic cycle in the economy, advance specialized initiatives to “anti-involution”, and phase out outdated and inefficient capacity. Expand domestic demand, boost consumption, and encourage investment, thereby identifying new drivers of economic growth. At the micro level, enhance the capacity to withstand external shocks and improve supply chain resilience by strengthening resource integration and collaborative management capabilities, optimizing the export structure. Third, fully unleash the growth potential of the digital economy, advance the construction of digital infrastructure and digital platforms, and foster new global digital industrial and value chains. Leverage the digital economy to create diversified markets, develop shared digital economy platforms with other countries and regions worldwide, and strengthen the capacity to respond to global risks.
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