From imitation to innovation: Where is all that Chinese R&D going? (with Michael König and Kjetil Sto resletten)
Abstract:
This paper analyzes the extent and effects of misallocation of R&D with
the aid of a structural model based on König et al. (2016). The theory pre
dicts that in an efficient environment innovation should be carried out by
high-productivity firms while low-productivity firms should focus on adopti
ng technologies from more productive firms. Misallocation arises when, due
to some investment wedges, it is less productive firms that invest in R&D.
We use China’s firm-level productivity data and R&D data from 2001 and 2007
. We find that high-TFP firms are more likely to do R&D, but the allocation
of R&D is subject to large distortions. The allocation of R&D expenditure
improves between 2001 and 2007, but remains significantly less efficient th
an the allocation of R&D in Taiwan in the late 1980’s. We also document a p
ersistent misallocation across ownership: state-owned enterprises do too mu
ch R&D relative to private firms. We conclude that the misallocation of R&D
can have large effects on aggregate productivity growth, and that a reduct
ion in such misallocation can be important in sustaining future economic gr
owth.