Productivity growth and openness in China

Abstract

The idea that trade openness breeds productivity growth has been expressed by many. As China has undergone rapid trade liberalization in the last two decades, it provides us with a natural platform to examine this relationship. This thesis uses sectoral data in China in the period of 1980-2003 to examine the impact of increased openness on the productivity growth in the tradable and non-tradable sectors of China. In particular, we explore the underlying mechanism of the positive association by examining the import discipline theory that the increase in competition as a result of increased openness is the main contributor to productivity growth. The major findings of this thesis are: i) there is significant evidence that productivity growth in the tradable sector is cointegrated with openness ii) there is some supporting evidence that the increase in competition in the domestic market is an important channel through which openness breeds productivity growth. These findings are robust to the use of alternative measures of openness and alternative assumptions of returns to scale and market structure.