Does the price of natural resources affect firms’ total factor productivity? Evidence from a natural experiment in China

Abstract This study uses a natural experiment on a market reform implemented in China in 2006 to examine how the marketization of the pricing of natural resources affects the total factor productivity (TFP) of resource-oriented firms, focusing on Chinese A-share stocks. We adopt the difference-in-differences (DIDs) approach and show that the reform has significantly improved firms’ TFP. This study uses propensity score matching and dynamic DIDs and finds consistent results. Cross-sectional tests indicate that the TFP improvement is stronger for firms with greater misallocation of resources, lower political expropriation risk, and greater financial constraints. We also document that firms’ TFP has a catch-up effect and show that the reform has narrowed TFP gaps between firms. Our study provides clear policy suggestions and offers evidence of the economic consequences of the reform of the natural resources market.