Externality from China's Non-State Sector's Growth to State-Sector's Growth: An Empirical Assessment

Applying a modified modelling framework of Feder (1983) and of Ram (1986) to macroeconomic data from China, this paper assesses the direct and indirect (externality) contributions of the non-state sector growth to China’s economic growth, particularly to state-sector growth during the initial period of economic reform. The results from the empirical analysis show that the growth of the non-state sector has induced pressure on the state enterprises through intensified market competition to improve their efficiency, and has thus contributed to economic growth as an externality.