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From "Made in China" to "Innovated in China"

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From “Made in China” to “Innovated in China” presented by Xiaobo Zhang at the International Consortium for Applied Bioeconomy Research June 15th

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From "Made in China" to "Innovated in China"

  1. 1. From “Made in China” to “Innovated in China” Xiaobo Zhang, Peking University and IFPRI 22nd ICABR Conference, World Bank, June 15, 2018 1
  2. 2. From demographic dividend to deficit 2 0 20 40 60 80 100 120 1980 1990 2000 2010 2016 Rank of real per capita GDP among 138 non-OECD countries Indonesia Brazil Vietnam Philippines Bangladesh Nigeria China India 48 52 56 60 64 68 72 1980 1990 2000 2010 2016 Share of working age cohort (15-59) in population (%) China India Indonesia Brazil Vietnam Philippines Bangladesh Nigeria Note: Figures in 2011 PPP. Source: ADB calculations from WEO April 2016. Source: Haver Analytics.
  3. 3. Rising Real Wages (Men) 3 0 10 20 30 40 50 60 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Dailywage(yuan) Eastern Central Western Zhang, Yang, and Wang, CER 2011
  4. 4. Options for Chinese firms • In: move to inland provinces • Out: outward direct investment • Down: shut down • Up: innovation and upgrading. Future growth must mainly come from labor productivity growth. 4
  5. 5. If you want to look reasons to say no, you can find many evidence 5
  6. 6. If you wish to look for optimistic examples, you can find them too. WeChat’s world 6
  7. 7. 7
  8. 8. What do the systematic data say? • Have Chinese firms become more innovative? • What accounts for the relatively fast pace of innovation (as measured by patent applications and approvals) by Chinese firms? • Is there possible resource misallocation in the innovation space? 8
  9. 9. R&D/GDP vs GDP per capita 9 Note: data for China are from 1995 to 2014, and data for all other countries are for 2014 or the latest year available. Source: OECD database and World Bank.
  10. 10. Number of Chinese patents has exploded 0 500 1,000 1,500 2,000 2,500 0% 20% 40% 60% 80% 100% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Thousands Sharetototal Chinese patent applications Invention (%) Utility model (%) Design (%) Total domestic applications (RHS) 10
  11. 11. What explains China’s innovation growth – Easy approval? – Government subsidies? – Taking advantage of expanding market opportunities – Spurred by rising wages? 11
  12. 12. Patent approval rate is not unusually high Patent Approval Rate in BRIC Countries, the Republic of Korea, and the U.S. 12
  13. 13. Invention patents in the US show a rising trend 13 Invention Patents Granted in USPTO by Different Countries
  14. 14. Growing patent citations indicate quality improvements 14 Citations on Invention Patents Granted by USPTO: Cross-country Comparison
  15. 15. Chinese product quality has steadily improved 15 Export Quality: Conditional Plot on Export Market Shares in Selected Countries
  16. 16. What drives the rising pace of innovation? • Rising labor cost • Expanding market • Subsidy • Firm characteristics (such as firm size) 16
  17. 17. Export firms are more innovative 17 Patent Intensity by Firm Export Status
  18. 18. Labor-intensive firms innovated more 18 Patent Intensity by Firm Capital Intensity
  19. 19. Key results • Robust (+) relationship between wages and innovation • Export firms are more innovative • Lower (foreign) tariffs are good for innovation • Invention patents respond (+) to subsidies • Firm size is (+) associated with # of patents • High tax rate discourages innovation • Higher cost of capital discourages innovation 19
  20. 20. SOEs granted more subsidies… 20 Ratio of Subsidies to Sales by Firm Ownership and Size Source: China annual above-scale industrial firm surveys.
  21. 21. …but lag behind private firms in patent generation 21 0 20 40 60 80 100 120 140 160 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Thousands Sharetototal Domestically granted patents Private firms (%) State-owned firms (%) Foreign firms (%) Total (RHS)
  22. 22. SOE R&D resources not efficiently spent 22 Variables Total Invention Utility model Design R&D (log)*FIE -0.006* -0.006 0.002 -0.016** R&D (log)*SOE -0.011** -0.020*** -0.004 -0.016 R&D (log) 0.015*** 0.017*** 0.013*** 0.012*** Sales (log) 0.274*** 0.328*** 0.254*** 0.287*** Observations 785,235 785,235 785,235 785,235 Firm FE YES YES YES YES Year FE YES YES YES YES AIC 300800 93583 192008 136310 Impact of R&D on Patent Output Note: China annual above-scale industrial firm surveys. R&D data are available only during 2005-2007.
  23. 23. Summary • The Chinese economy fortune is at crossroads • Chinese firms have become more innovated • Drivers of firm innovation: – (i) world market opportunities; (ii) rising labor costs • Possible misallocation – Subsidy allocation biased in favor of SOEs, but private firms innovate more. – Structural reforms that level the playing field can accelerate innovations 23
  24. 24. Reference “From "Made in China" to "Innovated in China": Necessity, Prospect, and Challenges,” (Shang-jin Wei, Zhuan Xie, and Xiaobo Zhang), Journal of Economic Perspective, 31 (1): 49-70, 2017. 24

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