Enterprise Productivity and Efficiency: When is Up Really Down?
Journal Of Comparative Economics, Vol. 24, No. 3, June 1997
Posted: 23 Oct 1997
A substantial body of literature has documented impressive total factor productivity (TFP) growth in China's state owned enterprises (SOEs) during the period of China's enterprise reform. Such growth rates have been used to support the view that China's reforms of SOEs have been highly successful. In this paper, we question the validity of using TFP growth rates as a "bottom line" measure of performance. In the spirit of a counter-example, we use a simple model to show that when firms are not profit maximizers for whatever reason, higher productivity may actually lead to greater allocative distortion, lower profits, and lower economic efficiency. On the basis of existing evidence, we argue that these conditions held for many Chinese state enterprises during the reform.
JEL Classification: O11, O47, O53
Suggested Citation: Suggested Citation