On the Performance of Foreign Direct Investment in China: 1981-2004

This paper centers on the measurement of the time-varying efficiency of foreign direct investment (FDI) in China from 1981 to 2004. I modify the standard stochastic production frontier approach to isolate the estimate of the technical efficiency of FDI. The estimations show that the FDI technical efficiency exhibits a U-shaped time pattern, i.e., there is efficiency deterioration in the early stage of China's reform and a gradual efficiency improvement after the mid-1990s. However, this U-shaped time pattern disappears when technical change (changing frontier) is taken into account.