Equipment Investment, Output and Productivity in China1 M.J. Herrerias†and Vicente Orts‡

The objective of this paper is threefold. Firstly, we provide evidence of the role played by equipment investment as determinant of output and labor productivity in China for the period 1962-2004. Secondly, we assess its robustness in allowing for other relevant sources of economic growth, and finally, we analyze the role played by these different factors on long-run growth. For this purpose we focused our analysis on two factors that have apparently played a relevant role in accounting for China’s growth, namely, equipment investment and exports. However, knowing the close relationships that exist between equipment investments with other variables, we have included R&D expenditure, human capital and infrastructures in our analysis. We start up our study exploring the link among equipment investment, R&D expenditure, exports and the real exchange rate as main determinants of labor productivity and output in the short and long-run, that is, our base model. Afterwards, we included human capital and infrastructures in our augmented model. Given the potential interdependence and endogeneity of the variables considered, we employed as statistical framework for analysis the cointegrated VAR model. Our results provide evidence that equipment investment and export