Innovation and Economic Growth in China

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ECONOMICS

INNOVATION AND ECONOMIC GROWTH IN CHINA

by

Yanrui Wu Business School The University of Western Australia

DISCUSSION PAPER 10.10

Innovation and Economic Growth in China

Yanrui Wu ( ) Economics UWA Business School University of Western Australia Australia yanrui.wu@uwa.edu.au

Abstract China has enjoyed high economic growth for three decades since the initiative of economic reform in 1978. This growth has however been driven mainly by labour-intensive, export-oriented manufacturing activities. Has innovation played a role in China’s economic growth? What are the determinants of innovation in the Chinese economy? These are some of the questions which are to be explored in this study. Answers to these questions have important policy implications for China’s economic development in the future as innovation is vital for the transformation of the country’s growth model.

Key words Innovation, economic growth, Chinese economy JEL codes O33, O53

延延吴

Innovation and Economic Growth in China

1. Introduction

Since the initiative of economic reform in 1978, China has enjoyed high economic growth for three decades. This growth has however been driven mainly by exportoriented, labour-intensive manufacturing activities. In 2008 the total value of China’s export accounted for 32% of the country’s GDP.1 In the mean time, tens of millions of workers were employed in the export sector. As a result the Chinese economy is very vulnerable to external shocks such as the 2008 US sub-prime credit crisis and the resultant recession and decline in demand for Chinese exports. To sustain economic growth in the future, China’s policy makers are keen to boost the role of innovation in the country’s economic development so that the economy will eventually be transformed into a knowledge-intensive one which is less dependent upon external markets (Schaaper 2009, Zhang et al. 2009). This goal is clearly envisaged in the country’s “Medium-to-Long Term Plan of National Science and Technology Development (2006-2020)” announced in February 2006.2

However, knowledge about China’s innovation capacity and potential is very limited. Has innovation played a role in China’s economic growth in the past three decades? What are the determinants of innovation in China’s regional economies? How can the capacity of innovation be boosted? These are some of the questions which are to be explored in this study. A thorough understanding of these questions is vital for policy making and hence the transformation of China’s economic growth model towards a sustainable pattern. In the existing literature, there are many studies which

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investigated the contribution of total factor productivity (TFP) changes to economic growth in China.3 Innovation in those studies is treated as part of the TFP contribution or the residual of economic growth which is not explained by changes in factor inputs. This study extends the current literature by focusing on innovation only and by measuring innovation in an alternative approach. The latter is based on Chinese patent data and probably attempted for the first time in this paper. The rest of the paper begins with a brief review of the main issues associated with innovation in China. This is followed by the description of the analytical framework. The estimation results and discussions are then presented. Subsequently sensitivity analysis is conducted in order to examine the robustness of the main models. Finally the paper concludes with some remarks.

2. The Link between Innovation and Economic Growth

Economists have for a long time been interested in the role of innovation in economic development or growth. In the neoclassical framework, the impact of innovation is treated as part of the Solow residual and hence a key contributing factor to economic progress and long-term convergence (Solow 1957, Fagerberg 1994). In recent decades, due to the popularity of endogenous growth theories,...
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