Openness, Technology Spillovers, and Resource Misallocations: Evidence from China

With an open economy and technology spillovers framework, this article develops a theoretical model that predicts resource misallocations and decomposes misallocations caused by markets forces and government interventions. Using panel data on 35 Chinese industrial sectors from 1993 to 2011, we conclude that trading with technology-leading countries worsens resource misallocations between industries and sectors, China's inter-industrial factor allocations go against Kuznets' theory that predicts production factors shift from less-efficient to more-efficient sectors, and the relative resource misallocation indices of the state-owned sector are higher than those of private sectors.