Changing Engines of Growth in China: From FDI and Privatization to Innovation and Knowledge Furong Jin, Keun Lee, and Yee-Kyoung Kim Dep’t of Economics, Seoul National University KOREA Globelics Academy 2007 Lisbon Portugal May 02. May 11

Contents Introduction Literature Review Data and Methodology Changing Engines of Growth in China China’s S&T policies and the performance of Knowledge/Innovation Knowledge/Innovation Performance Index and its Determinants Knowledge/Innovation Performance and Economic Growth Conclusion

Introduction December 1978 China’s Reform and Openness policies Remarkable Economic Performance 9% of average annual economic growth FDI? Privatization of SOE? Exports? Knowledge? Innovation? What is the driving force of such economic performance?

Existing Literature on Determinants of Growth in China (+) impact of FDI, Exports : Lee, 1996; Berthélemy and Démurger, 2000; Tian et al., 2004; Kawakami, 2004 (-) impact of bigger state sector  ( + impact of privatization) : Chen and Feng (2000), Phillips and Shen, 2005; Kawakami, 2004 Papers on the relationship between technological innovation and economic performance began to arise : Liu, 2006; Li and Florida, 2006

Data and Methodology China’s Provincial Data: & Source: China Statistical Yearbook on Science and Technology, China Statistical Yearbook Cross – Provincial Analysis OLS and 2-stage LS to control possible endogeneity of T variables (instrument variables) Y: Economic growth ( per capita income growth rates) T: Variables of our interests (knowledge/innovation performance) X: Basic variables (initial income, population growth, literacy, coastal dummy) and other control variables (Policy and infrastructure)

Economic Growth : Basic Regression vs Coastal dummy: + over both periods, Illiteracy rate and Population growth: - over the later period Initial income: - over the earlier period

Policies and Economic Growth: Rather, economic policy variables had significant impacts on growth. Exports and Foreign Direct Investment: + vs. ratio of State ownership: -

Policies and Economic Growth: The significance of such economic policy variables was reduced over the later period. Exports are still significant but Foreign Direct Investment and the ratio of State ownership lost their significance.

China ’ s S&T policies and the performance of Knowledge/Innovation May 1995: the Decision on Accelerating Scientific and Technological Progress.

China ’ s S&T policies and the performance of Knowledge/Innovation China now has the world’s fourth largest R&D spending worldwide, at USD 94 billion, just behind the United States, the EU and Japan (OECD STI outlook, 2006). China now has become the fifth leading nation in terms of its share of the world’s scientific publications, after the USA, Japan, the UK, and Germany, respectively (Zhou and Leydesdorff, 2006).

Methodology: Cross-Provincial Analysis 1 st stage: Knowledge/Innovation Performance Equation 2 nd stage: Economic Growth Equation : Knowledge/innovation performance (5 indicators of knowledge/innovation performance) : Instrumental variables, innovation system variables : Control variables : Economic growth : Predicted value of knowledge/innovation performance : Control variables (policy and infrastructure) Two-Stage Least Squares (Univ. graduates, R&D personnel, No. of computers & ratio of technology trade)

5 Indicators of Knowledge/Innovation Performance INDICATORCOMPONENTSIVs Patent 1)the number of patent applications (and grants) per 10,000 persons, 2)the increase rate of patent applications (and grants), 3)the number of utility patent applications (and grants) per 10,000 persons, 4)the increase rate of utility patent applications (and grants) 1)No. of R&D personnel in firms 2)No. of computers 3)Ratio of technology trade Papers 1)the number of domestic science research papers per 10,000 persons 2)The increase rate of domestic science research papers 1)Ratio of university graduates 2)No. of computers New Products 1)an increased rate of output values of new products of both nation-level and province-level 2)a ratio of output values of new products to sales. 1) Amount of book consumption 2) Ratio of government expenditure on S&T

5 Indicators of Knowledge/Innovation Performance INDICATORCOMPONENTSIVs Start-ups 1)the number of newly registered firms 2)the increase rate in the number of newly registered firms 1)Ratio of university graduates 2)No. of R&D personnel in firms Combined Knowledge/ innovation Indicator After summing up the above four indicators, then divide it by 4 1)No. Of university graduates 2)No. of R&D personnel in firms 3)No. of computers

Determinants of Knowledge/Innovation Performance: Patents No. of R&D personnel in firms, No. of computers, and Ratio of technology trade are all positively significant after controlling for other variables.

Determinants of Knowledge/Innovation Performance: Papers No. of university graduates, No. of computers are all positively significant at the 5 or 1% significance levels after controlling for other variables

Determinants of Knowledge/Innovation Performance: New Products Amount of book consumption, Ratio of government expenditure on S&T are all positively significant after controlling for other variables

Determinants of Knowledge/Innovation Performance: Start-ups The ratio of university graduates & no. of R&D personnel in firms are all positively significant after controlling for other variables

Determinants of Knowledge/Innovation Performance: Combined Indicator The ratio of university graduates, no. of R&D personnel in firms and the number of computers are all positively significant after controlling for other variables

Knowledge/Innovation and Economic Growth: No Knowledge/Innovation variables significant

Knowledge/Innovation and Economic Growth: 1997 –2003 1)Now, Knowledge/Innovation variables and illiteracy become significant. 2) Initial income lost significance or positive -> rising inequality.

Robustness Test I: Innovation to Growth Control Var. Economic Policies ( )

Robustness Test II: Innovation to Growth Control Var. Infrastructure and other variable ( )

Sensitivity Tests: Innovation to Economic Growth ( ) Different sample periods & proxy for the economic growth to test sensitivity. Household consumption is used as proxy (Beck & Laeven, 2004).

Conclusion Analyzed the changing determinants of economic growth in China: cross-province regressions For ( ), economic policies such as exports, FDI, privatization were more crucial factors of economic growth. Knowledge/innovation performance did not contribute to its economic growth. For ( ), Knowledge/Innovation performance such as patents, papers, new products and start ups turned to be crucial determinants; Only Exports, among other economic policy variables, confirmed its significance. Its robustness/Sensitivity were confirmed. FDI has no impact on knowledge/innovation performance

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