Discussion Papers

No.778 Allocation Efficiency in China's State-owned, Private, and Foreign Sector Firms

by Yoshihiro Hashiguchi

March 2020


Despite the fact many scholars have shown an interest in China's allocation efficiency, few studies have examined quantitative analysis of allocation efficiency within and between the state-owned and private sectors. To address this issue, this paper develops a quantitative measure of allocation efficiency, which is an extension of the dynamic Olley-Pakes productivity decomposition proposed by Melitz and Polanec (2015). The extended measure enables the simultaneous capture of the degree of misallocation within a group and between groups and parallel to capturing the contribution of entering and exiting firms to aggregate productivity growth. Using China's manufacturing firm-level data from 2003 to 2007, the author examine the efficiency of resource allocation within and between three ownership sectors (state-owned, domestic private, and foreign sectors). It is found that the between allocation efficiency tends to improve in industries wherein market shares move from the less-productive state sector to the more-productive private sector.

Keywords: Misallocation, Firm-level productivity, Structural estimation, China

JEL classification: D24, O47

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