Firm heterogeneity, biased technological change, and total factor productivity: Evidence from China

Biased technological change is a crucial factor contributing to the growth of total factor productivity (TFP). In this paper, we jointly estimate the demand and production function based on the factor-augmenting CES function, calculate TFP and decomposes it into its biased and neutral components. Using data from Chinese industrial firm, we have three main findings. The cross-sector averages for price elasticity and elasticity of substitution are −8.92 and 0.37, respectively. Capital-augmenting and labor-augmenting technologies grow at a faster rate than the material-augmenting technology. The annual growth in aggregate TFP is 2.19% from 1998 to 2007, and biased technological change accounts for almost 30% of it.