Productivity growth in China’s large industrial firms: patterns, causes, and implications

China’s economy has experienced a high-rate growth since the reform and opening up in 1978. However, some macro-statistics indicated that China’s economy grows with a low efficiency. In fact, these conclusions based on macro-statistics and the performance of the economy as a whole cannot reflect the multi-level, dynamic and, therefore, complicated situation of China. By using firm-level data, and the stochastic frontier production model, this paper makes an investigation on the changing trends of TFP of China’s LMIE between 1995 and 2002, and the decomposition of factors of growth. Main findings include: (1) the weighted average of the annual growth of TFP in China’s large and medium sized industrial enterprises was as high as 6.8 % with a rising trend during 1996-2002; (2) the contribution to TFP growth by the factor of Frontier Technology Progress reached as much as 14 percentage points per annum on average; (3) the decline in Technical Efficiency (Relative to the Frontier) reduced the TFP growth by 7.1 percentage points per annum on average; (4) Allocative Efficiency contributed on average only 0.02 percentage points per annum to the TFP growth and Scale Dis-Economy slowed the growth of TFP by 0.33 percentage points per annum. The results show that at the turn of the century, the most important part of China’s industry was in the middle of an industrial productivity revolution driven by both Frontier Technological Progress and the great potential of technical efficiency of lagging enterprises. The revolution is driven by increased competition, privatization, foreign investment, and business expansion.