How important is domestic and foreign demand for China’s income growth by business function?

Abstract

This paper explores the contribution of domestic and foreign demand to China’s income growth by business function. To this end, we extend a single country input–output approach to a global multi-country setting, and further redefine the measure via forward linkages. We also propose chaining structural decomposition analysis to identify the role of domestic and foreign demand in functional income changes over 1999–2011. Using the World Input–Output Database combined with Labor Occupations Database, we distinguish functional activities in production, management, marketing and R&D. This enables us to find that domestic and foreign final demands, especially the former, jointly lead to China’s income growth by business function. Dynamically, the generally upward trends in China’s income hold in the aggregate as well as by industry and business function. We also find that China’s income growth is quite heterogeneous across industries and business functions.