Productivity, scale effect and technological catch‐up in Chinese regions

Purpose – The purpose of this study is to investigate the driving forces of China's recent rapid economic growth and its sustainability in the future. Design/methodology/approach – A stochastic production frontier approach is employed in order to investigate regional productivity performances of Chinese provinces over the period 1994‐2006. Findings – Despite the general concern of widening regional inequalities in China, the findings show a striking trend of convergence among Chinese provinces over the last decade. The empirical results also reveal a significant contribution of foreign direct investment and foreign trade to economic growth. From a macroeconomic point of view, the strong trend of economic convergence among regions could give evidence on the sustainability of rapid economic growth in China in the near future. In addition, the empirical findings show that Chinese provinces tend to compensate negative scale effects by rising productive efficiency through technological progress. Research limitations/implications – Further investigation of the non‐neutrality of technological component can yield a better understanding of the underlying convergence mechanism. Practical implications – That is to say, policy makers should pursue their initiative to promote backward regions in western and inland regions and to encourage their economic integration through the free movement of production factors across regional borders. Further investment in physical and human capital construction in backward provinces are also needed to stimulate the catch‐up process. Originality/value – The main contribution of this methodology is the ability to introduce various returns to scale production technology and to decompose regional productivity scores over time into two major components, namely scale and pure technical efficiencies.