THE EFFECTS OF FEDERALISM AND PRIVATIZATION ON PRODUCTIVITY IN CHINESE FIRMS † Sean M. Dougherty and Robert H. McGuckin ‡ ABSTRACT This study offers empirical evidence about how the structure of government and private ownership affects productivity in Chinese firms. It uses the microdata of China’s most recent decennial industrial census, covering all of the 23,000 large and medium industrial firms operating in China during 1995. The results show that government decentralization – “federalism” – plays an important role in improving the performance of not just collective firms, but also state- owned and mixed public/private ownership firms. This result is strongly confirmatory of much of the recent theoretical work on transition economies that posits a key role for government in the efficient operation of markets. Privatization makes a big difference in performance for firms administered at the federal level, especially state-owned enterprises. Private ownership also makes a large difference for wholly foreign-owned firms, nearly all located in special districts. In local jurisdictions, however, there is little difference in productivity across the various non- state ownership types, supporting the argument that the regulatory environment played a critical role in successful business performance. JLE Codes: D23, H73, K23, O14, P31 † We would like to thank an anonymous reviewer, participants of the Finance and Economics Session of the American Economic Association 2001 annual meeting in New Orleans, the Sino-U.S. Economic Forum in Beijing, the Comparative Analysis of Enterprise Microdata (CAED) Conference in Copenhagen, the International Workshop on the Chinese Economy in Shanghai, and the Economics Research Working Group at The Conference Board for their comments. The paper also benefited from discussions with Gail Fosler, Doug Guthrie, and Liu Xielin. ‡ Sean M. Dougherty is Economist and Robert H. McGuckin is Director of Economic Research, The Conference Board, 845 Third Avenue, New York, New York 10022.