Total factor productivity critical for future growth

Editor's note: In 2025, China's R&D investment accounted for 2.8 percent of its GDP, which was higher than the average share of R&D of countries of the Organisation for Economic Co-operation and Development. In a recent interview with Securities Times, Liu Qiao, former head of the Guanghua School of Management at Peking University, said such investment helps increase total factor productivity. Below are excerpts of the interview. The views don't necessarily represent those of China Daily.

Total factor productivity refers to the "efficiency of utilization" of production factors.

For example, a person working on a machine could produce only one unit in the past, but now produces five units. The extra four units are the result of higher total factor productivity. The core drivers of this increase in productivity are technological progress, improved management and enhanced efficiency in resource allocation. R&D investment underpins technological progress.

China's total factor productivity increased steadily during the 14th Five-Year Plan (2021-25) period. This growth is corroborated by the latest data from both domestic and international institutions. The improvement in productivity indicates that the pattern of China's economic growth is transforming from one driven by scale and investment to one driven by innovation and greater efficiency.

Higher total factor productivity enhances people's well-being, as greater efficiency tends to bring about industrial upgrades and foster new businesses, which in turn create new jobs. It also optimizes the employment structure in traditional industries, helping people who used to perform manual labor master more sophisticated and better skills.

The overall volume of social wealth may also increase as a result, and the government will likely be able to direct more fiscal resources to education, healthcare and eldercare. A rise in household incomes will allow people to spend more on high-end consumption and enjoy better services.

During the 15th Five-Year Plan (2026-30) period, China's total factor productivity will need to increase by an average 1.8 percent or more every year to offset the possible pressures from diminishing efficiency of capital and the weakening contribution of labor to economic growth. To maintain the pace, it is essential that the country transform its development pattern, and make technological progress a primary driver.

This in turn calls for continued efforts to improve the efficiency of R&D investment and resource allocation, and to deepen the reform of institutions and mechanisms.

China enjoys solid and favorable conditions for ensuring that its total factor productivity increases by the required average of 1.8 percent or more per year.

The country ranks second in the world in terms of total R&D investment. Investment in basic research, though accounting for a relatively smaller share of the country's R&D spending, has been increasing steadily.

China has a complete industrial system, enabling it to transform technological innovation into real productive forces. By deepening market-oriented reforms, expanding high-standard opening-up and removing institutional barriers, the country could improve the efficiency of its economy.

In addition, the average number of years of schooling of China's working population continues to rise, and the pool of scientific and technological talent keeps expanding, providing sufficient human capital for technological progress.