An earlier study by Otsuka, Liu and Murakami(1998) found that there existed significant scale diseconomies among machine tool enterprises in the beginning of the 1990s following the market reform for intermediate inputs in China. Using our own survey data collected in 1992 and 2003, this study traces the economic reform process and the changes in enterprise scale and productivity in the machine tool industry. Based on a Cobb-Douglas production function estimated by the two stage least squares method, we find that the significant scale diseconomy among machine tool enterprises disappeared after the implementation of enterprise reform, which drastically reduced employment size of large enterprises.
