Promoting Higher Productivity In China — Does Innovation Expenditure Really Matter?

The slowing down of the global economy adds additional challenges to China’ economic policies as the country orchestrates its transition to lower resource dependency and higher technology intensity of output. Are policies aimed at technologically advanced sectors the right answer? Drawing from a newly created dataset of firms’ balance sheets over the period 1998–2013, matched with patents data until 2009, we uncover that expenditure in innovation had limited effect on boosting productivity, without generating a clear gain in overall productivity for the high-tech sector. As a matter of fact, there is a much higher dispersion in productivity outcomes in firms belonging to the low-technology sectors, which derives from a bunch of champions in those sectors scoring higher productivity dynamics than in the High-technology sectors. The paper finds those barriers to entry and in general, market power of incumbents in the high-tech generate less than optimal resource reallocation, which hampers the overall productivity. Policies should presumably aim at removing such obstacles rather than solely promote innovation expenditure.