From imitation to innovation: Where is all that Chinese R&D going? EGC Research Summary, March 2022
Chinese investments in research and development (R&D) have burgeoned since the turn of the century, increasing more than tenfold in absolute terms since 2000 and reaching a high of 2.4 percent of GDP in 2020. As the world’s second biggest spender on R&D after the United States, China is certainly a force to be reckoned with on the global innovation landscape. Its fresh push toward innovation-led growth and stated ambition of becoming a technological innovation powerhouse by 2050 have prompted questions: is China on course to attain its goals, and will greater investments in R&D — as promised by Premier Li Keqiang — get it there?
In a study forthcoming in Econometrica, Yale economist Fabrizio Zilibotti and coauthors Michael König, Zheng Michael Song, and Kjetil Storesletten tackle this question through the lens of misallocation.
Results at a glance
- Despite the extensive labor and capital market distortions emphasized in the literature on Chinese economic development, R&D investments have been an important driver of China’s productivity growth.
- Nevertheless, alleviating distortions in the Chinese economy would boost the productivity of innovation, by creating the conditions for the “right firms” to invest in R&D.
- Hence, reducing misallocation not only promises significant static efficiency gains (gains when the economy is in equilibrium), but also dynamic gains (gains as the economy adjusts toward equilibrium), because it spurs the firms with a natural comparative advantage in innovation to undertake R&D.
- The targeting of innovation-based policy matters. Heavy expenditure on R&D — for instance through government subsidies — cannot guarantee high growth and could backfire, if it incentivizes unproductive firms to innovate and pass up the more suitable innovation strategy of imitating.