Domestic Innovation and Chinese Regional Growth, 1991-2004

We examine the return to innovation in terms of economic growth at the provincial level to assess whether or not policies that promote R&D, such as China’s Science and Technology Policy, have been productive for all of China’s regions. The return to innovation at the provincial level is estimated using a value-added Cobb-Douglas production function. The measure of the effect of innovation (patenting activity) is valued-added industrial output. The data are a balanced panel for 30 provinces for the period 1991-2004. We find that the production function including innovation fits the Chinese provincial level data well. These estimates indicate that technology plays a positive role in industrial growth at the provincial level; however, the contribution of technology is far too small, which indicates that China’s economic growth is largely driven by the factor inputs. The results support the views that the linkages between innovation activity and commercialization of new technology are weak within Chinese domestic firms which have difficulties in exploiting and adopting the new technologies. The results also indicate that the inter-regional technology spillovers are positive but relatively small and weak, compared to the European regions and the states in the US. The estimated results further confirm that the impact of industrial reforms during the period of 1994-99 on China’s technological development is negative, as there seems to be neither exogenous technical progress nor technology’s contribution to the value-added industrial output during those years.