Demand Forces of Technical Change: Evidence From the Chinese Manufacturing Industry

University of Zurich, Department of Economics, Working Paper No. 277

33 Pages Posted: 10 Feb 2018

See all articles by Andreas Beerli

Andreas Beerli

University of Zurich - Department of Economics

Franziska Weiss

University of Zurich - Department of Economics

Fabrizio Zilibotti

Yale University; Centre for Economic Policy Research (CEPR)

Josef Zweimüller

University of Zurich - Department of Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Date Written: January 18, 2018

Abstract

This paper investigates the effect of domestic market size on innovation activities across different durable good industries in the Chinese manufacturing sector. We address the endogeneity of market size by an IV strategy, based on a measure of potential market size, which is driven only by changes in the Chinese income distribution. This measure is exogenous to changes in prices and qualities of durable goods and is a valid instrument for expected future market size. Our results indicate that an increase in market size by one percent leads to an increase in firm-specific total factor productivity by 0.46 percent and an increase in labor productivity by 0.50 percent. These findings are robust to controlling for export behavior of firms and supply side drivers of R&D.

Keywords: China, Demand-Induced Innovation, Directed Technical Change, Durable Goods, Economic Growth, Engel Curves, Market Size, Middle Class, Non-Homothetic Preferences

JEL Classification: D31, L11, L68, O31, O33

Suggested Citation

Beerli, Andreas and Weiss, Franziska and Zilibotti, Fabrizio and Zweimueller, Josef, Demand Forces of Technical Change: Evidence From the Chinese Manufacturing Industry (January 18, 2018). University of Zurich, Department of Economics, Working Paper No. 277, Available at SSRN: https://ssrn.com/abstract=3114264 or http://dx.doi.org/10.2139/ssrn.3114264

Andreas Beerli (Contact Author)

University of Zurich - Department of Economics ( email )

Zürich
Switzerland

Franziska Weiss

University of Zurich - Department of Economics ( email )

Zuerich, 8006
Switzerland

Fabrizio Zilibotti

Yale University ( email )

New Haven, CT 06520
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Josef Zweimueller

University of Zurich - Department of Economics ( email )

Zuerich, 8006
Switzerland
+411 634 3724 (Phone)
+411 634 4907 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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