From “Made in China” to “Innovated in China”: Necessity, Prospect, and Challenges

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.

Can a Tiger Change Its Stripes? Reform of Chinese State-Owned Enterprises in the Penumbra of the State

“…Furthermore, only POEs benefit from sophisticated R&D efforts (i.e., highly cited patented research and research in high-tech sectors). Wei et al (2017) find that although SOEs have received more subsidies from the government, their performance in innovation is lackluster compared to private enterprises. Furthermore, the elasticity of patent filings or patents granted with respect to expenditures on R&D is significantly higher for private firms than for SOEs, which suggests misallocations in public fiscal resources.…”

China's economic growth and convergence

“…Better‐quality human capital becomes more important as China is transitioning to a more innovative economy. It has shown strong progress in input and output indicators of innovation such as R&D expenditure, R&D researchers, patents, high‐tech and service export (Fan, ; Wei et al., ). Policies aimed at strengthening the research capacity of domestic firms and promoting the more efficient allocation of R&D expenditures will be important to stimulate productivity growth.…”

“…Exporters have been able to build up their comparative advantages in labour‐intensive manufacturing and then move to more capital and technology‐intensive industries. China is moving up the value chain towards more sophisticated, high‐value products and transitioning to a more innovative economy (Fan, ; Wei, Xie, & Zhang, ). On the other hand, there have been major employment shifts towards the services sector over the past decades.…”

A Stylized Model of China's Growth Since 1978

“…That is, in the Chinese case, the Deng Xiaoping reforms were the "exogenous impulse" that (among others) has driven the Chinese GDP growth since 1978. This fact is well known in the literature on Chinese reforms and growth (see for example Yao, 1999;Chow, 2004;Zheng et al, 2009;Zhu, 2012;Wei et al, 2017).…”