Grasp the Large, Let Go of the Small: The Transformation of the State Sector in China

Starting in the late 1990s, China undertook a dramatic transformation of the large number of firms under state control. Most small state owned firms were privatized or closed. In contrast, large state owned firms were corporatized and and merged into large industrial groups under the control of the Chinese state. We use detailed firm level data to show that that from 1998 to 2007, labor productivity of state owned firms converged with that of privately owned firms while total factor productivity growth of state owned firms was more than double that of private firms. However, capital productivity of state owned firms continue to be lower than that of private firms and did not change.