China vs. India: which is more productive?

Last week I mentioned the new World Bank book Dancing with Giants: China, India and the global economy. There were also a series of background papers commisoned for the project. One of them compared the productivity and performance of manufacturing businesses from China and India. Their conclusion? Chinese businesses invested more, and reaped higher productivity growth, than comparable Indian manufactureres. More flexible labour markets and access to finance also helped account for the differences observed.

The paper was written by Taye Mengistae, Lixin Colin Xu, Bernard Yeung: China vs. India: a microeconomic look at comparative macroeconomic performance (Word doc). Here is the abstract:

In comparable random samples of manufacturing businesses drawn from the two countries, Chinese establishments are found to have higher total factor productivity on the average than their Indian counterparts. Controlling for initial size, age, and line of industry, the average employment growth rate is higher for Indian establishments. Chinese plants grow faster in value added terms, nonetheless.

This is mainly because the average net investment rate in fixed assets is higher in Chinese businesses. To a lesser extent, it is also because productivity grows faster on the average in Chinese plants. Partly because of this, the aggregate productivity growth rate that we compute industry by industry is larger for the Chinese sample.

A second reason why the aggregate productivity growth rate is higher for the China sample is that allocative efficiency gains are larger in Chinese industry. By this we mean that market shares are reallocated from less productive plants to the more productive more rapidly (or steeply) in the Chinese sample. This is consistent with another finding: catch up effects and life cycle effects in productivity and growth, are stronger in the Chinese sample than in the Indian sample.

Lastly, such key elements of the business climate as labor market flexibility and access to finance are major sources of the productivity and growth gaps between Chinese and Indian plants. If nothing else mattered, the average Chinese businesses would be more productive and would grow faster than its Indian counterparts on account of business climate differences between the two countries. This is not so much because business climate indicators are better in China than in India as because the marginal return to improvements in indicators is higher in China.

Comments

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But isn't it has been argued and shown in many other discussions that India scores thumbs up over China when it comes to ROI ?

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