Chinas economic growth miracle despite complicated administrative approval formalities prompted us to raise the following question: Is it true that reforming administrative approval will promote economic growth? Based on our analysis on market entry, we discovered that reforming administrative approval will spur economic growth by reducing transaction cost for firms. Administrative approval may suppress social cost and propel Chinas economic growth; Chinas gradualist approval reforms may indeed propel economic growth by reducing transaction cost for firms. With the data of prefecture-level cities during 2000-2013 and data of companies listed on the SME board during 2010-2014, we tested the effects of approval reforms on economic growth and on transaction cost, and employed instrumental variable and PSMfor the treatment of the endogeneity problem-all these tests led to robust and consistent results. Moreover, we discovered that difference in government policy implementation in the approval process is the root cause of corruption and rent seeking.
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