Decomposition of Output, Productivity and Market Structure Changes

Building on the recent development in the literature on production function identification and decomposition methods, in this paper we examine the sources of output and productivity growth in China’s manufacturing industries from 1998 to 2007 using firm-level data. We first decompose the industry output growth into contributions stemming from the growth of the surviving firms and market dynamics, and then further decompose the former into the input factor deepening and firm productivity growth. To accommodate heterogeneity across firms in terms of production technology and sources of growth, we consider a nonparametric production function and decompose firm output growth at both the mean and different quantiles of the output distribution. Nonparametric estimation techniques and recentered influence functions are used to facilitate our decomposition. In addition, we decompose the aggregate industry productivity growth into three sources, viz., survivors’ productivity growth, market dynamics, and reallocation of market shares. Given the market-oriented economic reforms undergoing in China during our sample period, contributions to aggregate productivity coming from dynamic ownership changes are also examined.