PUBLICATION Journal article

Resource misallocation in Chinese manufacturing enterprises: evidence from firm-level data

Despite the important policy and welfare implications of China’s energy issues, to date there has been little investigation from a micro-level perspective of the misallocation of resources in manufacturing enterprises. To fill this gap, this paper deals with resource misallocations in China with special reference to energy and labor inputs. Using a large, novel dataset of manufacturing enterprises from Zhejiang province, we employ a simultaneous system of equations for (gross) industrial output value, wage bill, energy expenditure and carbon emissions. The explanatory variables include labor, educational attainment of employees, capital value, materials, and a list of energy-related variables. Our results show that, for the same energy content, non-coal energy inputs are more productive than coal and coal-related fuels. Noncoal energy is more environmentally friendly but more expensive than coal-related fuels. Using the model estimates, we conduct Wald tests on whether the marginal productivity of labor and energy significantly differ from their respective factor costs. The main findings are that there is substantial resource misallocation in manufacturing enterprises, with labor being underpaid and energy overpaid, on average, in comparison to their marginal productivity. For energy misallocation, however, the pattern varies considerably among the various subsectors. Specifically, energy is over-used in sectors such as Textile, Paper, Chemical, Plastics, Non-metallic, Ferrous metals and Non-ferrous metal. By contrast, energy is under-used in sectors such as Beverages, Textile-wearing apparel, Leather, Metal, Transport equipment, Electrical machinery and Communication equipment. These findings can assist decision-makers in targeting the sectors where there is the most misallocation, identifying which input factors are inappropriately used, improving economic efficiency and lowering overall production costs by reducing allocative inefficiency.

Keywords: China, energy productivity, Firm-level data, Resource misallocation

Li, C. Z., and Wei, C. 2017. Resource misallocation in Chinese manufacturing enterprises: evidence from firm-level data. Journal of Cleaner Production 142:837-845.