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Technical Progress and Induced Innovation in China: A Variable Profit Function Approach

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  • Wong, Gary

    (University of Macau)

  • Fleisher, Belton M.

    (Ohio State University)

  • Zhao, Min Qiang

    (Xiamen University)

  • McGuire, William H.

    (University of Washington Tacoma)

Abstract

We propose a new methodology to estimate empirically the input price-induced technical change and total factor productivity (TFP) growth in China. Our primary goal is to test Hicks' induced innovation hypothesis by examining whether technical change in China has been induced by sharp increase in input prices that have accompanied its rapid economic growth. Utilizing the idea of a firm's two-stage optimization problem, we develop a new parametric form of the variable profit function wherein the derived input demand and output supply functions can be easily constrained to be regular, and the functional structure is parsimonious in the number of parameters. Applying this methodology to Chinese time series data for 1986–2015, we find that not only is wage-induced innovation significant and quantitatively important, but also that it substantially buffers a long-term decline in TFP growth that would otherwise be quite substantial. We conclude that China's economic growth is predominantly driven by wage-induced innovation along with massive injection of heavily subsidized physical inputs in public works and huge investment in industrial sectors.

Suggested Citation

  • Wong, Gary & Fleisher, Belton M. & Zhao, Min Qiang & McGuire, William H., 2020. "Technical Progress and Induced Innovation in China: A Variable Profit Function Approach," IZA Discussion Papers 13017, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp13017
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    Cited by:

    1. Ka Kei Gary Wong & Min Qiang Zhao, 2023. "Induced innovation and its impact on productivity growth in China: a latent variable approach," Empirical Economics, Springer, vol. 65(1), pages 371-399, July.

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    More about this item

    Keywords

    induced innovation; total factor productivity; variable profit functions; China;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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