Misallocation and Manufacturing TFP in China and India

Chang-Tai Hsieh, Peter J. Klenow

NBER Working Paper No. 13290
Issued in August 2007, Revised in December 2008
NBER Program(s):Economic Fluctuations and Growth, Productivity, Innovation, and Entrepreneurship

Resource misallocation can lower aggregate total factor productivity (TFP). We use micro data on manufacturing establishments to quantify the potential extent of misallocation in China and India compared to the U.S. Compared to the U.S., we measure sizable gaps in marginal products of labor and capital across plants within narrowly-defined industries in China and India. When capital and labor are hypothetically reallocated to equalize marginal products to the extent observed in the U.S., we calculate manufacturing TFP gains of 30-50% in China and 40-60% in India.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w13290

Published: Chang-Tai Hsieh & Peter J. Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," The Quarterly Journal of Economics, MIT Press, vol. 124(4), pages 1403-1448, November. citation courtesy of