R&D Returns, Spillovers and Firm Incentives : Evidence from China

1. R&D Returns, Spillovers and Firm Incentives: Evidence from China Henry GuofangHuang John Hopkins University Wei Li University of Virginia LixinColin Xu World Bank

2. A Clear and Present Danger:A Non-Randomista is amongst Us! Regressionista

3. A Clear and Present Danger:Data are almost always Imperfect

4. China has relied more on Kgrowth lately • China has relied on capital growth rather than TFP growth since mid 1990s. • TFP growth has played an increasingly smaller role (Zhengand Hu 2006; OECD 2005). • From the 1979-1993 to the 1993-2005 period, • the contribution of TFP for the total growth has declined from 43% to 32%, • that of capital increased from 44% to 62%. • Similarly, Lin and Wang (2008): • the share of TFP contribution to GDP growth has dropped from 31% in 1978-1999 to 20% in 2000-2005.

5. Rooms from institutional reforms less and less • Less from rural migration. • Less from ownership restructuring & privatization. • Currency appreciation pressure. • More has to come from innovation. • Similar to OECD and U.S. after 70s oil shocks.

6. What this paper do • Estimate R&D marginal returns • How do R&D returns depend on firm incentives & level of development? • Within-industry spillover effects? • Allow to differ by distance between firms

7. Contributions to the study of R&D effects in China • substantial R&D returns at firm level in China (Jefferson et al. 2002). • R&D inputs increase the share of new products • R&D in China is not merely used as adapting foreign technology in China (Jefferson et al 2002). • Returns to private R&D tend to be higher than those to public R&D (Hu 2001). • R&D has dropped over time though still substantial (Hu and Jefferson 2004). • significant complementarity between own R&D and foreign technology transfer (Hu, Jefferson and Qian 2005). • We differ • a random sample, (above-scale large and medium enterprises). • more firm characteristics, • how R&D effects depend on CEO incentives and development level, • allow for the spillover effects and depend on distance between firms, • at a later period when R&D dramatically increased.

8. Literature two: The general study of R&D effects • see Griliches 1998; Mairesse and Mohnen 1994. • we focus on the largest developing and the fastest-growing economy • instead of samples of firms in developed countries • allow return heterogeneity across regions, development levels, and firm incentives. • allow the spillover effects to depend on distance between firms. • find evidence that indeed spillover effects tend to be smaller for firms located farther apart.

10. The data • The investment climate survey of 120 cities. • Cover all provinces except Tibet. • 100 firms each city, • Four mega cities: 200 • More or less a stratified random sample. • General questions to CEOs: cross section • Quantitative questions: panel of 3 years. • City information

11. Empirical specifications • Estimate the following • Interpretation of key coefficients: • Marginal return to R&D capital. • Spillover effects: • N firms in industry k * (within-city direct effects + indirect effects for indk * average distance between firm i and j in indk)

20. Conclusions • Average R&D return: 0.40 or so. • Reasonably robust. • Higher return: • Private firms, corporations (relative to SOEs, collective, foreign). • Indications that high costs of capital, higher return: financial constraint? • Non-government-appointed CEO. • No short-term incentives (weak). • Inland areas • Significant within-industry spillover • Total spillover effects: additional 1 to 19 percent for some industries. • Implications: • R&D returns substantial for a fast-growing economy. • R&D may be one avenue for convergence. • Subsidy for R&D?