1

Firm Turnover and Productivity Growth in Chinas

Manufacturing industries

by
Zhu Kepeng
The School of Economics, Anhui University of Technology
MaXiang Road, Maanshan City, Anhui Province, 243032, China
E-Mail: zhukepeng@hotmail.com
Mobile: +86-(0)188-5552-3601

Abstract
Since Chinas reform and opening up, the overall productivity of industrial firms has been increased.
Especially in the early 21st century, the overall productivity growth is particularly rapid, calculated
according to some researchers. What causes the overall productivity growth of industrial firms? This
article discusses the role of firm turnover. Firm turnover changes industrial structure and the overall
industry productivity will increase during reallocation. Using the data provided by National Bureau of
Statistics of China, this article calculates firms productivity in Chinas textile, chemical, mechanical
and electronics industry from 2000 to 2007. Industrial productivity is calculated by aggregating firms
productivity. With GR method (Griliches and Regev, 1995), FHK method (Forster, Haltiwanger and
Krizan, 1998) and BG method (Baldwin and Gu, 2003) the four industries productivity growth are
decomposed. The results show that firm-turnover has played an important role in overall productivity
growth through reallocation effect directly and within effect indirectly.

Keywords: firm turnover; productivity; growth competition

1 Introduction
After reform and opening-up, China's economy has experienced rapid growth. Especially in
manufacturing, average annual growth rate of value added was as high as 10.5% from 1978 to 2003.
According to UNIDO, China's manufacturing industry accounted for only 3.5% of the world
manufacturing value added in 1993. By 2003, this proportion had increased to 6.9%. "Made in China"
is one of most important economic phenomena in the world.
What supports the fast growth rate? Output growth may be caused by input growth and by total
factor productivity growth. For manufacturing, most studies found that after the mid-1990s the total
factor productivity increased rapidly and has a significant contribution to output growth. According to
Wu (2007), in the period from 2000 to 2005, average annual growth rate of value added growth in unit
labor was as high as 18.4% and such a high rate of growth largely depended on the growth of TFP. In
2

2000-05, the growth rate of manufacturings TFP was up to 14.7%. Nearly 4/5 of the growth of added
value per unit labor can be explained by TFP growth. Well, the related question is: how does an
economy achieve TFP growth? Why was TFP growth rate of Chinas manufacturing so high at the
beginning of the 21st century? This article intends to explain the TFP growth from the perspective of
firm turnover.
It is necessary to define the terminology firm turnover. It not only refers to new firms replacing
the old firms. According to Cave (1998) , firm turnover includes three processes: (1) the births and
deaths of business units ("entry and exit"); (2) variations in sizes and market shares of continuing units
("mobility"), and (3) shifts between enterprises in the control of continuing business units ("changes in
control"). This paper mainly examines the first two forms of firm turnover.
For a long period of time, aggregate data are used in industrial productivity analysis. Using
aggregate data, industrial productivity was estimated. On the basis of measuring TFP, researchers
examined the effect of capital, education, R&D, trade and other factors on productivity, and discussed
relevant industrial policies. From 1980s, some countries manufacturing firm databases were available
to researchers, such as the U.S. Census Bureau's LRD (Longitudinal Research Database), the UKs the
ARD database statistics (Annual Business Inquiry Respondents Database). Canada, Germany, Portugal
and other countries have similar databases. These data are often referred to as longitudinal micro-level
data (LMD), which includes a large number of or even all of firms data from year to year within an
industry. Using LMD, we can examine the effect of firm turnover on overall productivity growth.
Since Baily, Hulten and Campbell (1992) calculated the contribution of firm turnover to ovarall
productivity growth of an industry with the share-shift method, the research literatures on this field
have increased rapidly. These researches involve not only to developed countries, but also the
developing countries and transition economies. Overall productivity growth ware decomposed into
with-in effect and reallocation effect. The reallocation effect is the direct effect of firm turnover on
overall productivity growth. For developed countries, Foster, Haltiwanger and Krizan (1998), Disney,
Haskel and Heden (2003), Baldwin and Gu (2003); for developing countries or regions, Griliches and
Regev (1995) Liu and Tybout (1996), Aw, Chen and Roberts (2001), Petrin and Levinshon (2005); for
transition economies, Roberts and Thompson (2005) calculated the with-in effect and reallocation
effect.
With the development of industrial statistics and surveys, more and more firm information have
been available for researchers in China. The major firm databases include industrial firm database of all
state-owned and non-state-owned above a certain size provided by the National Bureau of Statistics of
China. This article uses this database to analyze the firm turnover and its effect on overall productivity
growth in textiles, chemicals, machinery, and electronics manufacturing firms in the early 21
st
century.
In Section 2, we introduce the analysis methods and data. The results are given in Section 3. Section 4
is summary of the main conclusions of this article.
2 Methods and Data
2.1 Individual productivity
We calculate each firms productivity by following the method of Good, Nadiri and Sickles (1997).
The productivity of firm i in year t is
3

( ) ( )
(
(

|
|
.
|

\
|
+
=

=
m
k
k
t
k
t i
k
t
k
t i
t i t i t i
X X
v v
Q Q p
1
2
ln ln ln ln ln
,
,
, , ,

( ) ( )
(
(

|
|
.
|

\
|
+
+

= =

=

t
s
m
k
k
s
k
s
k
s
k
s
t
s
s s
X X
v v
Q Q
1 1
1
1
1
1
2
ln ln ln ln (1)
Where Q
i,t
, v
i,t
k
and X
i,t
k
denote the gross output of firm i in year t, the cost share of factor k
for firm i in year t, and firm is input of factor k in year t, respectively. Variables with an upper
bar denote the industry average of that variable. This index measures the productivity level of firm
i in year t in a certain industry in comparison with the productivity level of a hypothetical
representative firm in the base year in that industry. The hypothetical firm has input cost shares
that equal the arithmetic mean of costs over all firms and has output and input levels that equal the
arithmetic mean of the log of the output and the inputs over all firms in that industry.
2.2 Overall productivity and its growth decomposition
We calculate the overall productivity of an industry by following the method of Baily, Hulten and
Campbell1992. The overall productivity of an industry in year t is the average of incumbent
firms productivity in that year weighted by their output share.

e
=
t
I i
t i t i t
p s P ) ln ( ln
, ,
2
Where s
i,t
is the firm is output share in year t; I is the set of incumbent firms.
The overall productivity growth from year t-1 to year t is


e

e
= A
1
1 1
t t
I i
t i t i
I i
t i t i
p s p s P ) ln ( ) ln ( ln
, , , ,
3
The overall productivity growth can be decomposed into with-in effect and reallocation effect.
With-in effect is caused by productivity growth of continuing firms, while the reallocation effect is
caused by firm turnover.
There are many kinds of decomposition method, among which GR (Griliches and Regev,
1995), FHK (Forster, Haltiwanger and Krizan, 1998) and BG (Baldwin and Gu, 2003) are used
wildly.
The GR decomposition method can be expressed as



e

e
e e
+
A + A = A
X i
t i t i
N i
t i t i
C i
i i
C i
i i
P p s P p s
s P p p s P
) ln (ln ) ln (ln
) ln ln ( ln ln
, , , , 1 1
(4)
Where C, N, X denote a set of continuing firms (which exist in year t-1 and year t), a set of
entering firms (which exist in year t but not in year t-1) and a set of exiting firms (which exist in
year t-1 but not in year t). Variables with an upper bar denote the average of that variable in year t
and year t-1.
In GR decomposition, overall productivity growth equals the sum of within-plant effect
(

e
A
C i
i i
p s ln ), share-shift effect (

e
A
C i
i i
s P p ) ln ln ( ),entry effect
4

(

e

N i
t i t i
P p s ) ln (ln
, ,
) and exit effect (

e


X i
t i t i
P p s ) ln (ln
1 , 1 ,
).
The FHK decomposition method can be expressed as


e

e

e e

e

+
A A + A + A = A
X i
t t i t i
N i
t t i t i
C i
i t i
C i
t i t t i
C i
i t i
P p s P p s
p s s P p p s P
) ln (ln ) ln (ln
ln ) ln (ln ln ln
, , , ,
, , , ,
1 1 1 1
1 1 1
(5)
In FHK method, overall productivity growth is decomposed into within-plant effect
(

e

A
C i
i t i
p s ln
, 1
), between-plant effect (

e

A
C i
t i t t i
s P p
, ,
) ln (ln
1 1
), cross-plant effect
(

e
A A
C i
i t i
p s ln
,
),entry effect (

e

N i
t t i t i
P p s ) ln (ln
, , 1
) and exit effect
(

e


X i
t t i t i
P p s ) (ln
, , 1 1 1
). Cross-plant effect can be calculated with this method compared
to GR method.
The BG decomposition method can be expressed as


e

e
e

e

+ A A +
A + A = A
N i
t X t i t i
C i
i t i
C i
t i t X t i
C i
i t i
P p s p s
s P p p s P
) ln (ln ln
) ln (ln ln ln
1 , , , ,
, 1 , 1 , 1 ,
(6)
In FHK method, exit effect is normalized to 0. Thus, as long as productivity of entry firms are
high than that of exit firms, the entry effect is positive. In other method, entry effect can be negative,
because this effect is comparing the productivities between entry firms and incumbent firms.
2.3 Data Construction
With the methods discussed above, we need data about input, output and cost share of all firms in an
industry. There is a database can be used to calculate the overall productivity approximately with this
method. This database is the industrial firm database of all state-owned and non-state-owned above a
certain size (firms with sales more than 5 million yuan RMB) provided by the National Bureau of
Statistics. Using the database, this article will analyze the overall productivity growth of firms in
textiles, chemicals, machinery and electronics manufacturing industries with the methods discussed
above. All state-owned firms are included in this database, while non-state-own firms with sales less
than 5 million yuan RMB are not. For comparability, this articles analysis does not include all the
firms with sales less than 5 million RMB. In China, firms above the size can account for more than 90
percent of gross industrial output value of all.
Table 1 gives the number and gross industrial output value of the firms with sales more than
5 million yuan RMB in textiles, chemicals, machinery and electronics manufacturing industries.
Table 1 The number of firms and gross industrial output value in 2000-2007
year
textiles chemicals machinery electronics
number GOV number GOV number GOV number GOV
2000 8132 460 8661 548 6723 275 3667 704
2001 9143 500 9359 601 7381 315 4131 864
5

2002 10237 575 10024 689 8239 384 4641 1101
2003 12709 732 10649 856 8675 465 5339 1548
2004 22501 1002 15727 1220 14521 665 8748 2214
2005 20848 1223 15578 1536 14331 834 8458 2681
2006 23518 1475 17301 1917 16471 1079 9255 3287
2007 25936 1798 19430 2506 19358 1426 10838 3894
Unit: billion yuan RMB

The output is GOV (gross output value) in this article, and there are three factors: labor input,
capital input and intermediate input. Using the database and other related information, we can calculate
the number of labor, capital stock, intermediate input and the cost share of three factors. For
comparability, we eliminate the disturbance of price change as much as possible.
3 Results and Discussion
3.1 The extent of firm turnover
In this article, we focus on two types of firm turnover: "mobility" and "entry and exit".
3.1.1 Mobility
Following the approach of Baldwin (1995), we measure this type of firm turnover by growth rate
of gainers and shrinkage rate of losers. The growth rate of gainers is measured by value of
difference between outputs of gainers in year t and year t-1 dividing the output of all incumbent
firms in year t-1, while the shrinkage rate of losers is by absolute value of difference between
outputs of gainer in year t and year t-1 dividing the output of all incumbent firms in year t-1. The
sum of growth rate of gainers and shrinkage rate of losers is the turnover rate of this type. In this
article, turnover rate (I) denotes this rate.
Table 2 describes this type of firm turnover in textiles, chemicals, machinery and electronics
manufacturing industries from 2001 to2006.
Table 2 Mobility in 4 manufacturing industries from 2001 to 2006

2001
~2002
2002
~2003
2003
~2004
2004
~2005
2005
~2006
Average
annual
Textiles
Output share of gainers in t-1% 65.1 62.1 42.1 61.1 62.1 58.5
Average productivity of gainers in t-1 0.015 0.050 0.193 0.359 0.467 0.217
Average productivity growth of gainers 0.051 0.167 0.181 0.132 0.120 0.130
Growth rate of gainers% 21.9 21.3 16.9 29.7 20.7 21.7
Output share of losers in t-1% 25.1 27.2 32.5 25.8 31.6 28.5
Average productivity of losers in t-1 0.005 0.043 0.199 0.367 0.471 0.217
Average productivity growth of losers -0.029 0.093 0.113 0.045 0.048 0.054
Shrinkage rate of losers% 5.6 6.4 9.8 4.1 5.7 6.1
Turnover rate (I) 27.4 27.7 26.7 33.8 26.4 27.8
Chemicals
Output share of gainers in t-1% 63.7 63.0 58.1 55.6 63.1 60.7
Average productivity of gainers in t-1 -0.018 -0.002 0.016 0.038 0.047 0.016
Average productivity growth of gainers 0.029 0.051 0.038 0.032 0.087 0.047
Growth rate of gainers% 16.6 20.4 20.2 31.1 35.7 23.8
6

Output share of losers in t-1% 26.3 23.0 22.2 31.6 29.4 26.5
Average productivity of losers in t-1 -0.024 -0.010 0.043 0.042 0.039 0.018
Average productivity growth of losers -0.050 -0.021 -0.053 -0.044 0.006 -0.033
Shrinkage rate of losers% 6.1 4.0 5.6 5.8 11.8 6.2
Turnover rate (I) 22.7 24.4 25.8 36.8 47.5 30.0
Machinery
Output share of gainers in t-1% 70.2 62.4 51.1 61.1 72.7 63.5
Average productivity of gainers in t-1 -0.036 -0.008 0.041 0.137 0.203 0.067
Average productivity growth of gainers 0.043 0.075 0.108 0.087 0.088 0.080
Growth rate of gainers% 23.7 25.0 22.3 28.7 26.7 25.2
Output share of losers in t-1% 18.6 13.3 15.6 22.8 20.2 18.1
Average productivity of losers in t-1 -0.049 -0.017 0.058 0.132 0.187 0.062
Average productivity growth of losers -0.044 0.006 0.016 0.011 0.020 0.002
Shrinkage rate of losers% 4.1 2.9 6.6 4.1 3.8 4.2
Turnover rate (I) 27.8 27.9 28.9 32.8 30.5 29.3
Electronics
Output share of gainers in t-1% 64.0 70.9 67.1 62.8 70.2 67.0
Average productivity of gainers in t-1 -0.070 -0.017 0.145 0.283 0.407 0.149
Average productivity growth of gainers 0.118 0.188 0.188 0.156 0.138 0.157
Growth rate of gainers% 35.0 44.5 36.1 33.8 29.0 35.3
Output share of losers in t-1% 31.8 22.3 22.7 31.0 25.2 26.6
Average productivity of losers in t-1 0.006 0.047 0.174 0.332 0.419 0.195
Average productivity growth of losers -0.029 0.019 0.057 0.007 0.011 0.013
Shrinkage rate of losers% 10.4 5.5 5.7 10.0 6.2 7.3
Turnover rate (I) 45.4 50.0 41.7 43.8 35.2 42.6

Table 1 shows some features of this type of turnover in 4 industries from 2001 to 2006:
First, the extent of this type of turnover is high in the 4 industries from 2001 to 2006. The
average annual turnover rate of this type in textile, chemical and machinery industries is about
30%, while that in electronics industry achieves 40%. The high turnover rate is most caused by
output growth of gainers.
Second, although there is no significant difference in productivity between gainers and losers,
the productivity growth rate of gainers is obviously higher than the losers. This indicates that
gainers are often the firms whose productivity increases relatively fast.
3.1.2 Entry and exit
We use entry rate and exit rate to measure this type of firm turnover. Similar to the above approach,
the entry rate is measured by the output value of entry firms dividing the output of all incumbent
firms in year t-1, while the exit rate is by the output value of exit firms dividing the output of all
incumbent firms in year t-1. The sum of entry rate and exit rate is the turnover rate of this type. In
this article, turnover rate (II) denote this rate.
Using Table 3 describes this type of firm turnover in textiles, chemicals, machinery and
electronics manufacturing industries from 2001 to2006.
Table 3 Entry and exit in 4 manufacturing industries from 2001 to 2006

2001
~2002
2002
~2003
2003
~2004
2004
~2005
2005
~2006
Average
annual
Textiles
Average productivity of entry firms
1
0.008 0.012 0.020 -0.046 -0.022 -0.006
Entry rate% 16.1 21.7 49.0 6.7 8.3 15.7
Average productivity of exit firms
2
-0.061 -0.051 -0.007 -0.006 -0.048 -0.035
Exit rate% 8.0 9.0 20.9 11.4 6.0 10.1
Turnover rate (II) 24.1 30.7 69.9 18.1 14.3 25.8
7

Chemicals
Average productivity of entry firms
1
0.014 0.018 0.019 -0.042 -0.035 -0.005
Entry rate% 15.1 17.6 34.6 9.0 9.2 15.0
Average productivity of exit firms
2
-0.074 -0.038 0.004 -0.014 -0.057 -0.036
Exit rate% 8.3 8.7 14.9 11.2 6.9 9.6
Turnover rate (II) 23.1 26.3 49.5 20.2 16.1 24.6
Machinery
Average productivity of entry firms
1
0.004 0.005 0.011 -0.016 -0.024 -0.004
Entry rate% 16.8 23.2 55.1 9.7 11.4 18.8
Average productivity of exit firms
2
-0.025 -0.043 0.010 -0.004 -0.018 -0.016
Exit rate% 9.3 15.7 26.6 14.3 6.3 12.8
Turnover rate (II) 26.1 38.9 81.7 24.0 17.7 31.6
Electronics
Average productivity of entry firms
1
-0.134 0.019 -0.022 -0.023 -0.007 -0.034
Entry rate% 11.2 21.0 28.4 3.8 8.4 11.6
Average productivity of exit firms
2
-0.031 -0.043 -0.017 -0.018 -0.015 -0.025
Exit rate% 3.1 3.2 6.9 5.2 4.3 4.3
Turnover rate (II) 14.3 24.2 35.3 9.0 12.7 15.9
Notes: 1.This productivity is relative to the average productivity of continuing firms in year t-1. 1.This
productivity is relative to the average productivity of continuing firms in year t-1.
Table 2 shows some features of this type of turnover in 4 industries from 2001 to 2006:
First, firm turnover of this type shows an increasing trend before 2004 and a decline trend
after 2004.The turnover rate is very high from 2003 to 2004 partly because of the data in 2004
obtained from economic census. Firm turnover of this type is most caused by firms entry. Entry
rates are higher than exit rates except in the period of 2003-2004.
Second, there is a positive correlation between entry rate and average productivity of entry
firms relative to continuing firms in the same year (see Figure 1). That is, the entry is more when
the productivity of entry firms is higher.
Third, there is a positive correlation between exit rate and entry rate in the 4 industries.
Figure 2 shows the relationship. In Figure 2, we put the exit rates and entry rates in 4 industries
into one figure. In the second feature, we have found a positive correlation between productivity
of entry firms and entry rate, while in this feature we have found a positive correlation between
entry rate and exit. We can speculate that the relationship among the three. If potential entrants
have a relatively high productivity, we would expect more firms to enter in the industry. This entry
will cause competition. Some incumbent firms will lose some market share, among which some
firms exit the industry. Then the two correlations will appear in this process. We can see from
Table 2 that exit firms are often the firms with a low productivity.
8


3.2 Direct contribution of firm turnover to overall productivity
growth
Using the approach of Baily, Hulten and Campbell (1992), we calculate the overall
productivity growth rate in the 4 industries from 2001 to 2006 (Figure 3).

Figure 3 Overall productivity growth in the 4 industries from 2001 to 2006
Notes: F, H, J and D denote textiles, chemicals, machinery and electronics industry, respectively.
In the period of 2001-2006, the overall productivity growth trajectories of textiles, machinery
and electronics industries are similar. There is an increasing trend before 2004, that is,
productivity increased faster and faster. After 2004, the growth rates decrease year by year.
Chemical industry is somewhat different. The growth rate decrease significantly during the period
of 2003-2005, even negative from 2004 to 2005.
R = 0.4365
0
10
20
30
40
50
60
-0.06 -0.04 -0.02 0.00 0.02 0.04
E
n
t
r
y

r
a
t
e

Relative productivity
Figure 1 Correlation between entry
rate and relative producivity of
entry rate
R = 0.6027
0
5
10
15
20
25
30
0 10 20 30 40 50 60
E
x
i
t

r
a
t
e

Entry rate%
Figure2 Correlation between exit
rate and entry rate
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0
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0
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0
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9

3.2.1 The results of GR decomposition

Figure 4 GR decomposition of overall productivity growth
Notes: F, H, J and D denote textiles, chemicals, machinery and electronics industry, respectively.
The results of GR decomposition show:
(1) Overall productivity growth is mainly caused by with-in effect from 2001 to 2006.
With-in effects account for 82.2%, 80.7%, 71.9% and 93.7% of overall productivity growth,
respectively.
(2) Reallocation effect is positive. Especially before 2004, reallocation effect account for
about 30% of overall productivity growth of textile, chemical and machinery industries. The
reallocation effect is mainly caused by the firm turnover of entry and exit in textile and
machinery industries. In the textile and machinery industries, share-shift effect is relatively small.
In chemical industry, most of reallocation effect is caused by the firm turnover of mobility. After
2004, the role of reallocation has become smaller.
3.2.2 The results of FHK decomposition
Table 4. FHK decomposition of overall productivity growth

2001
~2002
2002
~2003
2003
~2004
2004
~2005
2005
~2006
Average
annual
Overall productivity growth (textiles) 0.038 0.156 0.170 0.108 0.096 0.113
within-plant effect (%) 47.7 77.0 66.1 72.7 80.6 71.6
between-plant effect (%) -0.9 -1.2 -1.0 -3.1 -1.3 -1.5
cross-plant effect (%) 29.5 2.3 -5.0 20.5 8.9 6.5
entry effect (%) 21.5 18.8 37.2 4.2 7.5 19.8
exit effect (%) 4.7 1.6 0.3 2.4 2.2 1.7
Overall productivity growth (chemicals) 0.018 0.066 0.053 -0.017 0.061 0.036
within-plant effect (%) -0.2 64.8 64.5 59.5 71.7 61.2
between-plant effect (%) 20.2 6.5 -4.5 40.2 -24.0 -8.9
cross-plant effect (%) 77.9 12.8 16.3 -52.0 46.9 37.8
entry effect (%) -7.8 16.9 20.7 53.6 1.7 7.0
exit effect (%) 21.6 -1.4 -0.9 -13.0 1.7 3.1
Overall productivity growth (machinery 0.029 0.086 0.089 0.074 0.064 0.068
within-plant effect (%) 64.8 60.8 45.8 62.0 70.4 59.3
between-plant effect (%) -6.8 1.9 -4.4 -17.5 3.0 -4.5
cross-plant effect (%) 35.3 12.6 16.8 39.0 10.4 20.9
entry effect (%) 10.4 20.6 44.5 6.0 10.8 21.0
exit effect (%) -1.3 1.8 -2.2 2.9 4.0 1.1
Overall productivity growth (electronics) 0.069 0.131 0.148 0.103 0.089 0.108
-0.04
-0.02
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18
F
0
1
-
0
2
F
0
2
-
0
3
F
0
3
-
0
4
F
0
4
-
0
5
F
0
5
-
0
6
F
0
1
-
0
6
H
0
1
-
0
2
H
0
2
-
0
3
H
0
3
-
0
4
H
0
4
-
0
5
H
0
5
-
0
6
H
0
1
-
0
6
J
0
1
-
0
2
J
0
2
-
0
3
J
0
3
-
0
4
J
0
4
-
0
5
J
0
5
-
0
6
J
0
1
-
0
6
D
0
1
-
0
2
D
0
2
-
0
3
D
0
3
-
0
4
D
0
4
-
0
5
D
0
5
-
0
6
D
0
1
-
0
6
I
n
d
u
s
t
r
i
a
l

p
r
o
d
u
c
t
i
v
i
t
y

g
r
o
w
t
h

exit effect
entry effect
share-shift effect
with-in effect
10

within-plant effect (%) 106.3 85.7 85.8 66.0 82.4 84.0
between-plant effect (%) -26.2 -3.7 1.2 -25.5 2.1 -8.4
cross-plant effect (%) 30.1 4.6 -4.5 54.5 10.1 15.8
entry effect (%) -12.8 12.8 8.0 1.9 6.8 5.2
exit effect (%) 2.0 1.3 4.5 1.1 -2.1 1.7
Similar to the results of GR decomposition, with-in effect is still the main effect period from
2001 to 2006. In addition to that, we can find an important effect from FHK decomposition. This
effect is cross-plant effect, which is that the firms with a rapid productivity growth gain more
output share. The cross-plant effect accounts for a considerable proportion of overall productivity
growth in chemical, mechanical and electronics industries.
Although results of GR decomposition show that after 2004 the contribution of reallocation
effect decrease, but the cross-plant effect still plays an important role. In the period of 2004-2005,
cross-plant effect was still positive in chemical industry when the overall productivity growth was,
negative in the industry. In textile and mechanical industry cross-plant effect account for has 20.5%
and 39.0% of overall productivity growth in this period. This proportion has been up to 54.5 % in
electronic industry.
FHK decomposition also shows that entry effect is positive. Baldwin and Gu (2003)
suggested that entry effect be calculated by comparing the productivity of entry firms with that of
exit firms, not with incumbent firms. We can see the entry effect from the results of GB
decomposition.
3.2.3 The results of BG decomposition

Figure 5 BG decomposition of overall productivity growth
Notes: F, H, J and D denote textiles, chemicals, machinery and electronics industry, respectively.
The results of BG decomposition show that firms entry has a great contribution to overall
productivity growth. In textile industry, entry effect account for 22.4% of the total effect
(including with-in effect). It is the main effect of reallocation. In machinery industry, entry effect
and cross-plant effect are about of the same size. They account for 22.4% and 21.4%, respectively.
In electronics and chemical industry entry effects are relatively low, but also account for more
than 10%. Cross-plant effect is the main effect of reallocation in these two industries.
Until 2004, the main effect of reallocation is entry effect. After 2004, the contribution of
entry to overall productivity growth decreases. Cross-plant effect becomes a major reallocation
effect. In the period of 2001-2004, the productivity of incumbent firms is relatively low, while the
entry firms had a higher productivity. In this period, entry rate was high due to high productivity
-0.04
-0.02
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18
0.20
F
0
1
-
0
2
F
0
2
-
0
3
F
0
3
-
0
4
F
0
4
-
0
5
F
0
5
-
0
6
F
0
1
-
0
6
H
0
1
-
0
2
H
0
2
-
0
3
H
0
3
-
0
4
H
0
4
-
0
5
H
0
5
-
0
6
H
0
1
-
0
6
J
0
1
-
0
2
J
0
2
-
0
3
J
0
3
-
0
4
J
0
4
-
0
5
J
0
5
-
0
6
J
0
1
-
0
6
D
0
1
-
0
2
D
0
2
-
0
3
D
0
3
-
0
4
D
0
4
-
0
5
D
0
5
-
0
6
D
0
1
-
0
6
I
n
d
u
s
t
r
i
a
l

p
r
o
d
u
c
t
i
v
i
t
y

g
r
o
w
t
h

entry effect cross-plant effect
between-plant effect with-in plant effect
11

of entry firms. As time goes by, entry firm has become incumbent firms, and a large part of
incumbent firms have a high productivity. By 2004, there was no productivity advantage in entry
firms and entry rate became low. Then the contribution of entry effect to overall productivity
decreased. At this time, cross-plant effect replaced entry effect to be the main reallocation effect.
3.3 Indirect effect of firm turnover
Reallocation effect of firm turnover can be calculated by overall productivity growth
decomposition. That is the direct effect of firm turnover. Firm turnover can also affect overall
productivity in an indirect way. For example, it brings a competitive pressure on incumbent firms.
Incumbents have to continuously improve productivity to keep their profit. So firm turnover not
only affects overall productivity growth though reallocation effect, but also through with-in effect.
This indirect effect of firm turnover is called contestability effect by Bartelsman, Haltiwanger and
Scarpetta (2004).
Now we examine the relationship between productivity growth of continuing firms and firm
turnover. We establish a regression equation in which dependent variable is average productivity
growth of continuing firms. Taking into account differences in productivity growth between
industries, the industry dummy variables are set in the regression equation. The results are showed
in Table 5.
Table 5. Regression of average productivity growth of continuing firms
(1) (2) (3) (4 (5)
Constant -0.0070 0.0386 0.1036*** 0.1037*** 0.1072***
(-0.12) (0.62) (6.03) (6.04) (6.27)
Turnover rate (I) 0.0025* 0.0018
(1.95) (1.32)
Turnover rate (II) 0.0009** 0.0008*
(2.26) (1.72)
Entry rate 0.0010*
(1.72)
Exit raye 0.0024
(1.44)
textiles 0.0130 0.0150 -0.022 -0.0180 -0.0277
(DV) (0.48) (0.50) (-0.99) (-0.84) (-1.15)
chemicals -0.0754* -0.0755** -0.1032*** -0.0998*** -0.1102***
(DV) (-3.10) (-2.76) (-4.81) (-4.70) (-4.68)
machinery -0.0417 -0.0331 -0.0722*** -0.0668*** -0.0818***
(DV) (-1.60) (-1.14) (-3.18) (-3.07) (-3.00)
R
2
0.74 0.64 0.66 0.66 0.65
F 7.77 6.62 7.37 7.38 6.83
N 20 20 20 20 20
Notes: *** denotes p<0.01; ** denotes p<0.05; * denotes p<0.1. All numbers in parentheses are t-statistics.
The regression method is OLS. The default dummy variable is that of electronics industry.
12

Regression results show that firm turnover rates significantly affect productivity growth of
continuing firms, and the coefficient is positive.
In equation (1), the coefficient of turnover rate (I) is significantly positive, indicating that
mobility has a positive effect on productivity growth of continuing firms. But influence may be
the opposite direction. We have found that the firms with a rapid productivity growth grew fast. So
the positive coefficient of turnover rate (I) may meet the fact that rapid productivity growth lead to
high mobility, and not the opposite.
In equation (1), the coefficient of turnover rate (II) is also significantly positive, indicating
that mobility has a positive effect on productivity growth of continuing firms. Similarly to the
turnover rate (I), dose productivity growth of continuing firms affect t turnover (II)? We speculate
that productivity growth of continuing firms may affect exit rate. When continuing firms
productivity grows fast, firms with a low productivity or a slow productivity growth are ore likely
to quit. Then turnover rate (II) will be higher. Therefore, the positive coefficient of turnover rate
(II) could only show that the correlation between the two.
Among the variables of turnover rate (I), turnover (II), entry rate, and exit rate, only entry
rate is the variable which we have no reason to say is affected by productivity growth of
continuing firms. The results of equation (4) in table 5 show that coefficient of entry rate is still
significantly positive. Firms entry have two effects on productivity growth of continuing firms: (1)
Entry increases the incumbents risk of losing profit, forcing them to improve productivity; (2)
Entry Leads to the firms with a slow productivity growth exit, so that the continuing firms are the
firms with a high productivity growth.
Analysis above shows that firm turnover, at least new firms entry, have positive effects on
overall productivity growth through with-in effect. In addition to direct effects, indirect effect is
also an important effect of firm turnover.
4 Conclusion
This article examines the effect of firm turnover on overall productivity in China's textile, chemical,
mechanical and electronic manufacturing industries in the early 21st century.
In the period of 2001-2006, as for the type of firm turnover, mobility, the turnover rate was
high in the four industries. As for the type of firm turnover, entry and exit, the turnover rate was
high before 2004. After 2004, this turnover rate decreased. Interestingly, in this type of firm
turnover, there is a positive correlation between entry rate and productivity of entry firms. There is
also a positive correlation between exit rate and entry rate. From the correlation, we can speculate
the pattern of firm turnover as this: When potential entrants have a relatively high productivity,
more firms will enter in the industry. This entry causes competition. Some incumbents lose market
share, among which some firms exit the industry.
We used share-shift method to calculate the direct contribution of firm turnover on overall
productivity growth (i.e. reallocation effect). The results show that a considerable portion of
productivity growth is from reallocation effect. According to FHK decomposition, in the period of
2001-2006, the reallocation effect account for about 40% of annual overall productivity in
machinery and chemical industry, while nearly 30% in textile industry and 14.3% in electronics
industry. Cross-plant effect (caused by mobility) and entry effect (caused by entry and exit)
are the two most important reallocation effects. Before 2004, the main reallocation effect is to
13

entry effect. After 2004, cross-plant effect replaced entry effect to be the main reallocation
effect.
The indirect effect of firm turnover was also discussed in this article. When taking into
account the indirect effect, firm turnover contribute more to overall productivity growth.
Regression analysis showed that the productivity growth of continuing firms and entry rate is
highly relevant. In this way, firm turnover indirectly affect overall productivity growth through
with-in effect which is caused by the productivity growth of continuing firms.
Firm turnover is related to competition. There are two important functions in competition: Choice
and incentive. To some extent, this articles analysis shows that, the two competitions functions play
an important role on overall productivity growth in Chinas textile, chemical, mechanical and
electronics industry in the early 21
st
century.

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