Knowledge Economy and Industry Performance in China: A Provincial Level Analysis

Abstract

We construct a framework for investigating the effects of knowledge on industry performance. Using Chinese provincial industry data from 2000 to 2012, we decompose total factor productivity (TFP) change into the four components of embodied technical change, disembodied technical change, scale efficiency change, and technical efficiency change. Our results show a considerably stronger positive effect of advanced knowledge on production technology than of basic knowledge. International knowledge spillovers, particularly trade-induced spillovers, are more effective in inducing TFP growth than domestic spillovers. Our analysis further illustrates a discrepancy in TFP growth rates between regions. We also find TFP of the Central and West Region to be catching-up with the East Region. On average, scale efficiency change is the major contributing factor to regional disparities in terms of TFP change. From a policy point of view, the government should improve, for example, the level of knowledge through educational programs, and further focus on policies on urbanization or the development of regional centers to develop a competitive labor market, as well as on policies encouraging international trade.