Is output growth of Chinese manufacturing firms input or productivity driven? A flexible production function approach with endogenous inputs

In this paper, we focus on estimating output growth and its components attributed to quasi-fixed inputs, variable inputs, and productivity change, while treating variable inputs as endogenous. We consider two approaches. In the classical approach the time trend variable proxies for technical (productivity) change, while in the productivity (proxy variable) approach, we add a “productivity” term which is correlated with the variable inputs. Therefore, estimation strategies in the two models are different. Instead of using a Cobb–Douglas production function, we employ a translog production function to add flexibility. We showcase our theoretical results with Chinese manufacturing as an empirical exercise.