The study is about the dispersion in rates of provincial economic- and TFP growth in China. The results show that regional growth patterns can be understood as a function of several interrelated factors, which include investment in physical capital, human capital, and infrastructure capital; the infusion of new technology and its regional spread; and market reforms, with a major step forward occurring following Deng Xiaoping’s “South Trip” in 1992.
It is found that FDI had much larger effect on TFP growth before 1994 than after, and this was attributed to emergence of other channels of technology transfer when marketization accelerated. We find that human capital positively affects output per worker and productivity growth. In particular, in terms of its direct contribution to production, educated labor has a much higher marginal product. Moreover, a positive, direct effect of human capital on TFP growth was estimated. This direct effect is hypothesized to come from domestic innovation activities. The estimated spillover effect of human capital on TFP growth is positive and statistically significant, which is very robust to model specifications and estimation methods. The spillover effect appears to be much stronger before 1994. Cost-benefit analysis and a policy “experiment” was conducted, in which the impact increases in human capital and infrastructure capital on regional inequality was projected. The conclusion says that investing in human capital will be an effective policy to reduce regional gaps in China as well as an efficient mean to promote economic growth.
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