The Growth of Chinese R&D and Innovation

Abstract

China's GDP has grown at a tremendous rate over the last 40 years, but its total R&D expenditure has grown even more. We construct a model of firm dynamics which produces endogenous increases in R&D and productivity. We then take the model to the data and find that R&D expenditure as a percentage of GDP should have plateaued in the absence of government incentives. Also, Chinese firm productivity would have lagged more than 10 years behind without foreign technology spillovers. Finally, we assess the efficacy of various R&D policies. Giving greater R&D subsidies to less productive firms is more efficient, while giving greater subsidies to firms with lower R&D expenditures is not as efficient.

Keywords: R&D investment, economic growth, knowledge spillover, financial frictions

JEL Classification: E22, G32, O3, L11