Returns to scale in the production of selected manufacturing sectors in China

In the study on economic growth, international trade and economic geography, making different assumption on returns to scale may lead to stark difference in both theoretic conclusion and policy implication. A very important assumption supporting literatures in New Economic Geography is that production of manufacturing sector is characterized by increasing returns to scale. Around this assumption, much debate exists. There is no predominant conclusion from empirical study either. This study begins with a brief survey of the study on the assumption of returns to scale. Based on data from 17 selected sectors in manufacturing industry in China and using Diewert-Fox Model([1]), returns to scale in the production of selected sectors in manufacturing industry in China is investigated. It is found that all of the selected sectors in manufacturing industry in China show increasing returns to scale, and most of those sectors experience modest negative or zero technical change, which implies that economic growth in Chinese manufacturing industry over the recent two decades has largely been driven by increasing returns to scale rather than technical progress. (C) 2011 Published by Elsevier Ltd. Selection and peer-review under responsibility of RIUDS