Working Paper: NBER ID: w22854
Authors: Shangjin Wei; Zhuan Xie; Xiaobo Zhang
Abstract: After more than three decades of high growth that was based on an exploration of its low-wage advantage and a relatively favorable demographic pattern in combination with market-oriented reforms and openness to the world economy, China is at a crossroad with a much higher wage and a shrinking work force. Future growth by necessity would have to depend more on its ability to generate productivity increase, and domestic innovation will be an important part of it. In this paper, we assess the likelihood that China can make the necessary transition. Using data on expenditure on research and development, and patent applications, receipts, and citations, we show that the Chinese economy has become increasingly innovative. In terms of drivers of innovation growth, we find that embracing expanded market opportunities in the world economy and responding to rising labor costs are two leading contributing factors. On the other hand, we find evidence of resource misallocation in the innovation area: while state-owned firms receive more subsidies, private firms exhibit more innovation results. Innovation can presumably progress even faster if resource misallocation can be tackled.
Keywords: China; Innovation; Research and Development; Economic Growth
JEL Codes: O1; O3; O4; O53
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased R&D spending (O39) | Number of patents granted (O38) |
| Rising labor costs (J39) | Increased patent applications (O34) |
| Expanded market opportunities (F69) | Increased patent applications (O34) |
| Resource misallocation (D61) | Innovation performance of state-owned enterprises (L32) |
| Policy reforms (E69) | Innovation outcomes (O36) |