IMF, 2009); constrained investment due to weak corporate balance sheets, tight credit conditions and higher uncertainty in the aftermath of the crisis (Adler et al., 2017).<sup>9</sup> Although external factors may have contributed to the slowdown in China’s productivity growth, we identify several important domestic causes based on evidence from the Industrial Enterprise Survey, as well as aggregate financial sector data. Unfortunately, firm-level data that are representative of the service sector are not available. Given the growing importance of services in China’s economy, this is a significant shortcoming of our analysis.

# **2.1 Firm-level evidence of weaker productivity growth in manufacturing**

First, manufacturing firm data show that market entry and exit have contributed less to productivity growth in recent years compared to the early 2000s. Second, after a notable convergence in returns to capital and labor and TFP between private and state-owned manufacturing enterprises (SOEs) before 2008, SOE productivity has deteriorated since then. We also uncover differences in productivity across China’s provinces.

Aggregate TFP growth can be improved through two mechanisms. One is raising productive efficiency within firms through either innovation or adoption of more efficient existing technologies. The second is reallocating resources between firms, either by moving resources between existing firms or by the entry and exit of firms.<sup>10</sup> Before the global financial crisis, the net new entry of firms accounted for more than two-thirds of TFP growth in China, while the reallocation of inputs to more productive firms was limited (Brandt et al., 2012). Compared with the United States, there were large gaps in the marginal products of labor and capital between manufacturing firms within the same sector in China in 1998–2005 (Hsieh and Klenow, 2009). There were also large gaps in the returns to capital— between SOEs and private firms, between regions, and between sectors within China in 2002– 04 (Dollar and Wei, 2007). At the same time, TFP and the returns on labor of SOEs converged to those of private firms over 1998–2007, while the SOE returns on capital remained about 40 percent lower than private ones (Hsieh and Song, 2015). Differences in the marginal products of factor inputs (or returns to factor inputs) indicate the overall distortions some firms face within industries, such as firm-specific tax rates, subsidies, credit constraints, and trade barriers.

This paper updates through 2013 productivity estimates for China’s manufacturing sector that were originally made for 1998-2007 (Brandt et. al, 2012, 2017). The basis of these estimates is the firm-level data that are collected as part of the NBS annual Industrial Enterprise Survey. The survey covers all industrial firms with annual sales above RMB 5 million before 2008 and above RMB 20 million thereafter. The estimation methodology and how we deal with several measurement challenges, including inconsistent data at the individual firm level between 2008 and 2009, lack of data on firm-specific prices, and no data for 2010, are described in the appendix. The new estimates allow a comparison of productivity growth in industry before and after the global financial crisis.

Average annual TFP growth in manufacturing fell from 2.0 percent in 1998-2007 to 1.1 percent in 2007-13. This decline was spread across industries: 24 of 28 sectors at the two-digit level had lower TFP growth in 2007–13 than in 1998–2007 (Figure 8). More than a quarter of all sectors also experienced a decline in productivity in levels. Large reductions were observed in metal products, food processing, timber processing, and petroleum refining.

> 9 IMF (2009) provides an overview of the literature explaining the link between crises and productivity growth. 10 See Restuccia and Rogerson (2013) for a review of the literature on misallocation and productivity. 8