Inventory in mainland China: Historical, industry, and geographic perspectives David J. Robb a,n , Fei Liu b,1 , Richard Lai c,2 , Z. Justin Ren d,3 a Department of Management Science and Engineering, Tsinghua University, Beijing 100084, PR China b Sinochem Oil Guangdong Corporation Ltd, Room 1204-1212, NO.28 Huaxia Road, Zhujiang City, Guangzhou 510613, PR China c The Wharton School, University of Pennsylvania, 3730 Walnut Street, Philadelphia, PA 19104, United States of America d School of Management, Boston University, 595 Commonwealth Avenue, Boston, MA 02215, United States of America article info Article history: Received 23 November 2010 Accepted 22 August 2011 Available online 3 September 2011 Keywords: Inventory China Empirics in Operations Management Economic Geography Industry Effects Multivariate Regression abstract We review inventories in mainland China by evaluating the trajectory of aggregate inventories in recent decades, and then modelling the relationship of inventories in some 300,000 manufacturers with respect to volume (using cost of goods sold), industry (using SIC codes), and geographical location (using the 31 regions of China). We find that inventories generally exhibit economies of scale (in terms of cost of goods sold) in all but one industry (tobacco), and differ widely by province, with relatively high inventories in remote regions. We provide explanations for apparent diseconomies of scale for large unlisted firms, and reflect on why publicly listed manufacturers have significantly higher inventories than do unlisted firms. We note that manufacturing inventories as a proportion of manufacturing value-added are substantially higher in China than in the US The results may be employed for benchmarking and auditing of firms and managers, as well as for conducting due diligence for investment, mergers and acquisitions. & 2011 Elsevier B.V. All rights reserved. 1. Introduction Inventories play a vital role in the provision of products and services at all levels of an economy, and as such have been subject to numerous investigations, from product-level, to firm-, industry-, and sector-level studies. Inventories are also regarded as vital to include in macro-economic modelling (Blinder and Maccini, 1991). However, despite the growth of the Chinese economy in recent decades, little is known about inventories in mainland China. This paper provides insight into the status of inventories in China, including the relative intensity of inventories across regions 4 and industries, and their relationship to company size. We utilise both macro-economic (national and regional) and enterprise-level (manufacturing firms with revenues about 5 million RMB) data to test hypotheses concerning the impact of industry and firm location on inventory levels. We are particularly interested in the ratio of inventory to cost of goods sold, and the extent to which economies of scale, expected from inventory theory (e.g., effects related to economic order quantity and lot-size models, pooling effects, forecast error, and minimum order quantities) pertain across industries. We are also interested in the degree to which results hold for listed firms. China provides an ideal setting to examine various hypotheses, due to its hosting a wide variety of firms (in terms of size, industry, and ownership) as well as its diverse economic condi- tions and geographies. Furthermore, growth in factors considered to influence inventory levels, such as technology acquisition (both soft and hard) and the demand for product variety and service, have been both pronounced and rapid in China. The contributions of this paper are several. First, we use extrapolation methods combined with observed data to provide empirical evidence that the overall inventory as a percentage of GDP in China has been declining since the 1990s. So far as we know we are the first to show this. Secondly, with a novel model specification we establish the existence of a sub-linear relation- ship between inventory volume and firm size for almost all companies in China. That is, as companies grow bigger, their inventories generally do not grow as fast. Moreover, we show that such economies of scale are heterogeneous across industry and regions in China. Finally, in analysing the relationship between an enterprise’s inventory and its size, location, and industry, we provide not only a platform for comparisons with other Contents lists available at SciVerse ScienceDirect journal homepage: www.elsevier.com/locate/ijpe Int. J. Production Economics 0925-5273/$ - see front matter & 2011 Elsevier B.V. All rights reserved. doi:10.1016/j.ijpe.2011.08.020 n Corresponding author. Tel.: þ86 10 6278 9940; fax: þ86 10 6277 1647. E-mail addresses: david@sem.tsinghua.edu.cn (D.J. Robb), liu_fei@sinochem.com (F. Liu), lairk@wharton.upenn.edu (R. Lai), ren@bu.edu (Z.J. Ren). 1 Tel.: þ86 10 5956 8269; fax: þ86 10 5956 8180 8269. 2 Tel.: þ1 215 898 1630. 3 Tel.: þ1 617 353 2678. 4 We use the term region to denote the 22 provinces and 5 autonomous regions along with the 4 municipalities (Beijing, Shanghai, Tianjin, and Chongqing) under direct control of the central government. Int. J. Production Economics 135 (2012) 440–450