What determines misallocation in innovation? A study of regional innovation in China

This paper sounds an alarm about disparate efficiencies among China’s regions in the allocation of innovation inputs. A theoretical measure of misallocation is adopted to gauge the distortions that exacerbate the inefficiency of resource allocations across geographic innovation units; these units’ usage of innovative inputs reveals the level of misallocations prevalent within the Chinese economy. The measure of innovation misallocation is computed by utilizing a micro dataset based on information from the China Statistical Yearbook for Science and Technology (CSYST) from 1999 to 2012. In addition, this paper probes the factors that co-move with China’s innovation resource misallocations. We find that, although an advanced financial market is beneficial to innovation efficiency in China, both the government’s extensive development of transportation infrastructure and the preferential treatment given to state-owned enterprises (SOEs) and foreign-invested enterprises (FIEs) negatively correlate with innovation efficiency. We conclude that emerging economies that are experiencing R&D input expansion, such as China, should be cautious in ensuring efficient resource allocations.