Market Reform, Division of Labor, and Increasing Advantage of Small-Scale Enterprises: The Case of the Machine Tool Industry in China

Using survey data of machine tool manufacturing enterprises in China, this paper explores the effect of market reform on production efficiency by estimating a production function that includes dependence on purchased parts as an explanatory variable. According to the estimation results, the effect of purchased parts on production efficiency was insignificant in the early reform period but became significantly positive later. Further, we found that the dependence on purchased parts decreased with the size of enterprises, implying that the production efficiency became higher in smaller enterprises, including newly established township-village enterprises.