Understanding China's capital productivity and flow

Abstract

The evidence from China (and India) suggests that regional variations in FDI inflow and marginal productivity of capital can readily be explained by some of the usual and un-usual suspects: tax burden, corruption, expected growth rate, infrastructure, access to finance, court and custom efficiency, and quality of life. Given the vast variations in all these dimensions in various regions in China due to the decentralized nature and geography, the large variations in capital-labor ratio and marginal product of capital are perhaps not too difficult to rationalize. The fact that MPK depends on ownership, local leadership, and finance suggest that there is perhaps allocation inefficiency. What are fundamental causes, and their relative importance, and how important is the magnitude of inefficiency, however, remains to be investigated.