Intermediate service input distortions and total factor productivity: Evidence from China

China has the most minimal proportion of intermediate service inputs among the input-output datasets encompassing 43 countries and regions within the WIOD database. This study employs a non-parametric estimation methodology to compute the appropriate input levels for two distinct categories of intermediate goods. Furthermore, it evaluates the decline in total factor productivity resulting from distortions in intermediate input. The research findings are as follows: 1) China's producer services exhibit an output elasticity approximately twice that of industrial intermediate goods. However, the input for producer services is only about half of that for the latter. This points to a notable deviation of China's input for producer services from the optimal level. 2) Upon achieving an optimal level of input allocation for intermediates, the entire industry could experience an 11.48% boost in total factor productivity. In particular, the manufacturing sector could witness an impressive surge of 33.91%. 3) A positive correlation is discerned between intermediate input distortions and the import of intermediate products.