China: From Imitator to Innovator?

Abstract

For a long time, China was viewed as the world's “workbench,” rather than as a global innovator. However, recently, China undertook significant efforts to transform towards a research and innovation orientation, by, e.g., setting research goals in its 12th Five-Year Plan that established a Chinese National Patent Development Strategy. In this paper, we examine the effects of that government policy change and assess how it has impacted firm innovation. To address potential endogeneity concerns, we use the policy change as a quasi-natural experiment, and explain the exogenously caused variations. We also use a “difference-in-differences” approach to, e.g., propensity score matched U.S. peers, and find that the policy change had a positive effect on Chinese firms’ research spending, as measured by research intensity. We also show that Chinese firms increased their research spending in response to the strategic shift by the government in 2008, relatively outpacing their U.S. peers during the same time period. However, Chinese companies have not yet overtaken their U.S. peers. Rather, they have reduced the gaps between them.