Ling Yonghui: Breaking Down Structural Barriers to Rectify "Involutionary" Competition
Competition is a fundamental attribute of the market economy and the source of momentum for market circulation. However, "involuted" competition [1] is a manifestation of excessive competition; in essence, it occurs when a chaotic market order causes competitive costs to far exceed competitive returns. In recent years, varying degrees of "involuted" competition have appeared in some of China's traditional industries as well as certain emerging sectors. At the micro level, this severely squeezes corporate profit margins; at the macro level, it causes an imbalance in the supply-demand structure. This may form a vicious transmission path characterized by "declining corporate profits → suppressed income growth → insufficient effective demand → overcapacity of supply," which has become one of the "stubborn diseases" [2] that must be cleared away as we currently advance the construction of a national unified large market in depth. From the perspective of institutional economics, the key incentive for "involuted" competition is a structural contradiction—excessive administrative barriers coupled with insufficient market barriers—which causes a large number of Chinese enterprises to be locked into the low-to-mid-end segments of the industrial chain. These firms can neither achieve "upward" innovative upgrades nor "downward" rapid exits from the market; they can only compete within a limited market space primarily through the dimensions of price and quantity. The natural result is "involution." In view of this, China should comprehensively rectify "involuted" competition according to the principle of "upholding the fundamentals and breaking new ground" [3] (alternatively, the principle of simultaneous construction and destruction). On one hand, we must "perform subtraction" against excessive administrative barriers; on the other, we must "perform addition" regarding insufficient market barriers, thereby breaking the rigidity of structural barriers and strengthening the domestic Great Circulation [4].
How "Involuted" Competition is Formed
The causes of "involuted" competition are complex, involving both micro-level factors within enterprises themselves and macro-level cyclical fluctuations. Institutional factors likewise cannot be ignored. The structural contradiction between excessive administrative barriers and insufficient market barriers forces a large number of enterprises—either passively or actively—to congregate in specific segments of the industrial chain, creating an industrial structure "lock-in" effect. China possesses a large number of low-to-mid-end industries, and technologies in some emerging industries have also become relatively mature. Therefore, under current buyer-market conditions where supply is a fast variable and demand is a slow variable, excessive investment and redundant construction in low-to-mid-end industries will inevitably occur during the domestic economic circulation process, leading to product homogenization. Under these conditions, the means of corporate competition are often price variables, which may even intensify into vicious "price wars."
The first formation path: Excessive administrative barriers → "Obstructions" to corporate innovation and upgrading → Passive "involuted" competition. For a long time, the government has used administrative power to intervene improperly in the market, forming a high and thick administrative barrier. These administrative barriers can be divided into vertical and horizontal categories. Vertical administrative barriers mainly refer to the government's direct or indirect control over the allocation of production factors, leading to varying degrees of functional deficiency in these factor markets—such as the operating behavior of commercial banks under the control of administrative monopoly forces. Horizontal administrative barriers refer to the "quasi-market subject" intervention behavior of the government, especially "administrative division economy" competition manifested as local-government-led industrial policies. For example, local governments may adopt behaviors that exclude or restrict extraterritorial enterprises from participating in competition out of consideration for maximizing local interests. Under the influence of excessive administrative barriers, the vitality of enterprises to innovate and upgrade is suppressed; they are forced to compete for survival within the original low-to-mid-end segments of the industrial chain. As the market capacity of the original fields gradually saturates, the final result can only be "involution." Furthermore, excessive administrative barriers are also manifested as significant restrictions on corporate exit.
The second formation path: Insufficient market barriers → Corporate "swarming" toward the low-to-mid-end → Proactive "involuted" competition. The reality of China's industrial structure—with its vast number of low-to-mid-end industries—determines that the overall technical and capital thresholds for firm entry are not high. In this situation, a large number of new enterprises proactively flood the market, causing a rapid expansion of production capacity. More importantly, these new entrants tend to favor technological imitation over independent technological innovation. This "copy-paste" model further results in the entire industry lacking necessary technological "moats," which is detrimental to increasing industrial market concentration. In fact, a certain level of market concentration is conducive to enhancing an industry's capacity for spontaneous regulation and promoting autonomous coordination and cooperation among enterprises, thereby improving corporate performance levels. Although the market concentration of various sectors in China’s manufacturing industry has shown an overall upward trend over time, the report Origins and Regions: Observations on Two Types of Concentration (published in July 2025) shows that concentration in most manufacturing sectors—such as pharmaceuticals, automobiles, and food—remains low. This indicates that the distribution of enterprises within these industries is fragmented, with each firm acting on its own, which easily triggers "involuted" competition.
Breaking Structural Barriers through "Addition and Subtraction"
Based on the above analysis, the effective path for comprehensively rectifying "involuted" competition lies in performing "addition and subtraction" regarding excessive administrative barriers and insufficient market barriers to break the rigidity of structural barriers.
On one hand, we must "perform subtraction" against excessive administrative barriers. First, we must transform the implementation methods of industrial policy. Currently, in addition to reforms for openness and transparency, subsidies can be shifted toward consumers or users. This not only helps expand the market scale of emerging industries but also helps select enterprises that are truly outstanding in the eyes of consumers. At the same time, the focus of industrial policy support should be shifted from the back-end of the industrial chain to the front-end technological innovation stages, reducing support for simple production scale expansion. Second, we must carry out cross-regional fair competition reviews and standardize local government investment promotion behavior. This involves: 1) Expanding the scope of fair competition reviews to include investment behaviors led by local governments, especially irregular non-public investment subsidies; 2) Relying on major regional strategies such as the Yangtze River Delta Integration and the Guangdong-Hong Kong-Macao Greater Bay Area to explore the establishment of cross-regional and cross-departmental fair competition review mechanisms; 3) Having central economic departments work jointly with the Commissions for Discipline Inspection—especially Central Inspection Groups—to focus on inspecting whether local leading officials are violating the spirit of central documents regarding the construction of a national unified large market. Third, we must research and explore tax system reforms to create new and stable sources of revenue for local governments. Local governments’ interests have always remained on the investment and production side, the root of which lies in the Value-Added Tax (VAT) system collected at the production end. If we gradually shift to collecting consumption tax at the point of consumption—steadily moving the collection stage downstream to local governments, gradually expanding the scope of consumption tax, and eventually transitioning it into a universally collected retail tax—then phenomena such as local governments neglecting the market or the difficulty of boosting domestic demand will be improved.
On the other hand, we must "perform addition" regarding insufficient market barriers. First, we must persist in using standards to lead and dominate the industrial production layout. We should raise the thresholds for national and industrial standards regarding production, technology, safety, energy consumption, environmental protection, and quality, strictly controlling new capacity, accelerating the elimination of backward capacity, and orderly promoting the optimization and upgrading of the industrial structure. Meanwhile, we must improve incentive mechanisms for enterprises to increase R&D investment, encouraging them to create unique competitive advantages in product function, quality, and design, thereby pushing enterprises toward product differentiation competition. Second, we must make full use of capital markets to support leading enterprises in the M&A and restructuring of troubled firms, promoting large-scale and intensive operations to improve the supply-demand relationship. To this end, we must strengthen specialized regulation and rapid review mechanisms and optimize the institutional environment for M&A. For example, a 3–5 year transition period could be set for horizontal competition formed by M&A, allowing for gradual resolution through asset divestiture or business division to avoid mechanical regulatory constraints. We must also build a multi-level M&A financing system and broaden the sources of M&A funds. Third, we must vigorously strengthen industry self-discipline and credit constraints, leveraging the role of industry associations in supervising and coordinating the standardized development of industries. We could work with judicial institutions to establish M&A dispute mediation committees to provide "professional mediation + judicial confirmation" services for common issues such as valuation disagreements and performance commitment disputes. We could also cooperate with exchanges and the China Securities Regulatory Commission (CSRC) to build M&A risk monitoring models and establish a tripartite consultation mechanism between "industry associations, regulatory departments, and local governments." Furthermore, we can explore using blockchain technology to ensure that data is tamper-proof and connect it with the National Credit Information Sharing Platform to ensure the authenticity and timeliness of credit records, integrating public credit information with market credit information.
(The author is an Assistant Researcher at the Yangtze Industrial Economic Institute of Nanjing University) Source: Chinese Social Sciences Today (October 28, 2025) Web Editor: Huihui