China has achieved phenomenal economic development over the last three decades and is now the world's second largest economy. However, as observed by many economists, the country is characterized by a large and inefficient state sector, rising income inequality and severe resource misallocation, all of which hinder productivity growth. In Chapter 1, I argue that much resource misallocation and income inequality especially that between state and private sector workers, is a consequence of China's development strategy. This strategy emphasizes state dominance in capital-intensive sectors and state leadership in accelerating industrial upgrading. The state-dominated financial system provides cheap capital to state-owned enterprises (SOEs), which allows them to produce goods that are more capital intensive than permitted by China's labor abundant factor endowments without such strategy. This distortionary development strategy in turn contributes to inefficiency and inequality. I also provide historical and political reasons why China pursues such a strategy.;In Chapter 2 I examine the hypothesis of capital-skill complementarity using Chinese manufacturing data. This hypothesis says that capital is more complementary with respect to skilled labor than unskilled labor, and as such has clear links to inequality. I consider three types of skilled labor definition and use a range of econometric techniques, including nonlinear least squares and generalized method of moments (GMM), yet find only weak evidence in favor of the hypothesis in a limited number of industries. The results are consistent with the idea that countries at different development stage may have different capital-skill relationships.;In Chapter 3 I examine heterogeneous effects of investment climate variables on productivity and employment growth, using firm-level data from China, Malaysia and Vietnam. I accommodate heterogeneity using a quantile regression approach. The results show that firms in different productivity quantiles are differentially affected by investment climate variables. Improving credit availability is very effective in enhancing aggregate industrial productivity since it confers greater benefits to firms in lower quantiles. Longer import custom clearance times hinder employment growth for firms in higher quantiles. The study complements and enriches investment climate research by calling for more targeted efforts for firms at different quantiles (particularly the lower level) of the productivity distribution to enhance aggregate productivity and reduce resource misallocation.
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