The determinants of productivity in Chinese large and medium-sized industrial firms, 1998–2007

Using a large firm-level dataset, this paper examines total factor productivity (TFP) and its determinants in China. Our preferred GMM estimation results indicate increasing returns to scale in most industries and a usually large positive trend representing technical change. Various firm characteristics such as age, ownership, political affiliation, export behavior, liquidity, and geographic location are included in the production function. Our results show that in the context of China’s institutional background, including such factors is important when estimating TFP. The average TFP growth in Chinese industries is 9.6 % per annum during the period 1998–2007, and is mainly driven by firm entry. The subsector decomposition exercises show that the inter-firm resource reallocations are more prominent across industries than across provinces.