Changes in the Efficiency of the Chinese Manufacturing Industry

In analyzing the factors that have led China to move up in the structure of international vertical trade, a number of studies have focused on its trade dimension. Contrary to these studies, this research examines the role of Chinese manufacturing industry in China's upward shift in the value chain. This study measures the efficiency of Chinese manufacturing industry by adopting the stochastic frontier approach model, which uses the inefficient error term in the Cobb-Douglas production function. The manufacturing industry classification from EU-KLEMS and CEIC from the sample period of 1996 to 2005 for five countries (China, the United States, the United Kingdom, Japan, and South Korea) is the data used. The industry classification is classified into three categories according to technology level, following the OECD standard. The sample period is divided into two eras of 1996 to 2000 and 2001 to 2005, since China joined the World Trade Organization in 2001. This study finds that the efficiency of the Chinese manufacturing industry has substantially improved in the high- and medium- technology industries since 2001.This improvement in the Chinese manufacturing industry's efficiency appears to have helped China's transformation from a "world assembler" to a more sophisticated producer. These findings suggest that the export of intermediate goods from Japan and the East Asian Newly Industrialized Economies to China is likely to decline.