An Analysis of the Determinants of Total Factor Productivity in China

Abstract

In this study, I analyse total factor productivity (TFP) and its determinants in Chinese industrial firms. The results from the system-GMM estimation indicate the existence of increasing returns to scale and a positive impact on firms’ TFP arising from technological change. Moreover, the following factors were found to be determinants of higher TFP levels in most industries: lack of political affiliation, paid-in capital share owned by investors other than the State, Marshallian and Jacobian spillovers, age, marketing capabilities, internal liquidity and industrial competition. The results from the TFP growth decomposition indicate an annual average TFP growth of 9.68% across Chinese industrial firms during the period of 1998-2007. This was largely determined by the reallocation of resources across existing firms. From a policymaking perspective, measures targeting the previously mentioned determinants are likely to spur firms’ TFP and consequently drive national long-run economic growth.