ENTERPRISE PRODUCTIVITY AND EFFICIENCY - WHEN IS UP REALLY DOWN

A substantial body of literature has documented impressive total facto r productivity (TFP) growth in China's state-owned enterprises (SOEs) during the period of China's enterprise reform. Such growth rates have been used to support the view that China's reforms of SOEs have been highly successful. In this paper, we question the validity of using TF P growth rates as a ''bottom line'' measure of performance. In the spi rit of a counterexample, we use a simple model to show that when firms are not profit maximizers for whatever reason, higher productivity ma y actually lead to greater allocative distortion, lower profits, and l ower economic efficiency. On the basis of existing evidence, we argue that these conditions held for many Chinese state enterprises during t he reform. (C) 1997 Academic Press.