Financial Development and Total Factor Productivity Growth: Evidence from China

Abstract

In this article, we estimate the effect of China’s regional financial development on total factor productivity (TFP) growth using large provincial panel data for the years 1990 to 2009. Using the nonparametric stochastic frontier data envelopment approach, we analyze how financial development is related to efficiency improvement and technological progress, the two components of TFP. The study shows that Chinese financial development plays a significant role in promoting TFP growth via technological progress rather than efficiency change. The faster the financial development takes place, the better it could correct the mismatch of resource allocation, thus promoting TFP growth. The results imply that China needs to both further optimize the allocation of financial resources and perfect the regional financial system.