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
Date Written: January 18, 2018
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
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