Changing Engines of Growth in China: From FDI and Privatization to Innovation and Knowledge Furong...

Changing Engines of Growth in China:

From FDI and Privatization to Innovation and Knowledge

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

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

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 a

l., 2004; Kawakami, 2004

(-) impact of bigger state sector ( + impact of privatization) : Chen and Feng (2000), Phillips and Shen, 200

5; 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: 1988-1993 & 1997-2003• Source: China Statistical Yearbook on Science and Technology , China Statisti

cal Yearbook• Cross – Provincial Analysis

OLS and 2-stage LS to control possible endogeneity of T variables

(instrument variables)

i i i iY T X u

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 Regression1988-1993 vs. 1997-2003

Coastal dummy: + over both periods,

Illiteracy rate and Population growth: - over the later period

Initial income: - over the earlier period

<Table 1> Regression Results with Basic Variables

(1) (2)

1988~1993 1997~2003

Coastal dummy 3.231 1.471

(0.015)** (0.000)***

Illiteracy rate -0.077 -0.068

(0.368) (0.009)***

Initial income -1.741 0.003

(0.089)* (0.941)

Population growth -0.191 -0.932

(0.871) (0.000)***

Observations 30 31

R2 0.329 0.565

Policies and Economic Growth: 1988-1993

Rather, economic policy variables had significant impacts on growth .

Exports and Foreign Direct Investment: + vs. ratio of State ownership: -

(1) (2) (3)

Coastal dummy 2.513 3.408 2.096

(0.021)** (0.006)*** (0.205)

Illiteracy rate -0.062 -0.036 -0.089

(0.374) (0.651) (0.280)

Initial incom -2.411 -1.835 -0.302

(0.007)*** (0.054)* (0.855)

Population growth -1.301 -0.931 -0.309

(0.201) (0.414) (0.770)

Share of exports 0.119

(0.001)***

Share of FDI 0.325

(0.030)**

Ratio of state ownership -0.17

(0.023)**

Observations 30 30 30

R2 0.576 0.451 0.506

Policies and Economic Growth: 1997-2003

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.

(1) (2) (3)

Coastal dummy 1.15 0.712 1.443

(0.016)** (0.050)** (0.001)***

Illiteracy rate -0.078 -0.088 -0.07

(0.005)*** (0.000)*** (0.017)**

Initial income -0.011 -0.005 0.011

(0.811) (0.877) (0.856)

Population growth -1.054 -1.474 -0.951

(0.000)*** (0.000)*** (0.001)***

Share of FDI 0.085

(0.245)


(0.001)***

Ratio of state ownership 0.005

(0.846)

Observations 31 31 31

R2 0.589 0.729 0.566

0

10000

20000

30000

40000

50000

60000

70000

1988 198919901991 199219931994 199519961997 199819992000 200120022003 20042005

No. o

f inv

entio

ns p

aten

ts/

No. o

f pap

ers

0

0.2

0.4

0.6

0.8

1

1.2

1.4

R&D/

GDP

Inventions patents No. of Papers R&D/GDP

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

ˆ (2)i i i iY T X u

Z

1st stage: Knowledge/Innovation Performance Equation

2nd stage: Economic Growth Equation

H

T : Knowledge/innovation performance (5 indicators of knowledge/innovation performance)

: Instrumental variables, innovation system variables

: Control variables

YT̂X

: 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

INDICATOR COMPONENTS IVs

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

INDICATOR COMPONENTS IVs

Start-ups 1) the number of newly registered firms2) the increase rate in the number of newly registered

firms

1) Ratio of university graduates


Combined Knowledge/

innovation Indicator

After summing up the above four indicators, then divide it by 4

1) No . Of university graduates


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.

(1) (2) (3) (4) (5) (6) (7) (8)

Number of R&D personnel in firms 0.080 0.067 0.070 0.080 0.100 0.075 0.077 0.081

(0.004)*** (0.074)* (0.008)*** (0.004)*** (0.000)*** (0.003)*** (0.005)*** (0.004)***

Number of computers 0.028 0.026 0.033 0.027 0.033 -0.003 0.020 0.014

(0.048)** (0.066)* (0.018)** (0.095)* (0.010)*** (0.880) (0.199) (0.467)

Ratio of technology trade 0.230 0.218 0.211 0.231 0.205 0.302 0.248 0.273

(0.010)*** (0.020)** (0.014)** (0.012)** (0.010)*** (0.001) *** (0.008) *** (0.007) ***

Amount of book consumption 0.004

(0.622)

Ratio of government expenditure on education -0.037

(0.076)*

Ratio of government expenditure on S&T 0.008

(0.933)

Ratio of R&D expenditure of firms -0.430

(0.005)***


(0.027) **

Share of FDI 0.019

(0.357)

Share of export * Share of FDI 0.0004

(0.309)

Observations 31 31 31 31 31 31 31 31

R2 0.833 0.834 0.852 0.833 0.877 0.862 0.838 0.840

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 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

Ratio of university graduates 0.169 0.155 0.162 0.165 0.165 0.171 0.197 0.161 0.165 0.149

(0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)***

Number of computers 0.044 0.040 0.048 0.057 0.043 0.040 0.062 0.092 0.063 0.088

(0.007)*** (0.028)** (0.007)*** (0.005)*** (0.014)** (0.021)** (0.005)*** (0.000)*** (0.001)*** (0.000)***


(0.570)


(0.490)

Ratio of government expenditure on S&T -0.188

(0.229)

Number of R&D personnel in firms 0.011

(0.820)

Ratio of R&D expenditure of firms 0.167

(0.510)

Number of telephones -0.011

(0.190)

Share of exports -0.022

(0.003)***

Share of FDI -0.058

(0.060)*

Share of export * Share of FDI -0.002

(0.001)***

Observations 31 31 31 31 31 31 31 31 31 31

R2 0.826 0.828 0.829 0.835 0.826 0.829 0.837 0.875 0.848 0.882

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

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

Amount of book consumption 0.027 0.024 0.027 0.026 0.025 0.035 0.021 0.031 0.029 0.028

(0.002)*** (0.071)* (0.002)*** (0.003)*** (0.031)** (0.014)** (0.039)** (0.001)*** (0.001)*** (0.001)***

Ratio of government expenditure on S&T 0.476 0.471 0.465 0.460 0.439 0.579 0.454 0.607 0.555 0.560

(0.008)*** (0.010)*** (0.011)** (0.013)** (0.042)** (0.015)** (0.012)** (0.007)*** (0.007)*** (0.009)***

Ratio of university graduates 0.015

(0.744)

Ratio of government expenditure on education 0.020

(0.644)

Ratio of R&D expenditure of firms 0.175

(0.592)

Number of computers 0.008

(0.754)

Number of telephones -0.008

(0.483)

Ratio of technology trade 0.153

(0.320)


(0.301)

Share of FDI -0.033

(0.395)


(0.433)

Observations 31 31 31 31 31 31 31 31 31 31

R2 0.553 0.554 0.556 0.557 0.554 0.561 0.569 0.570 0.565 0.563

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

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

Ratio of university graduates 0.077 0.057 0.076 0.083 0.070 0.072 0.067 0.079 0.078 0.078

(0.000)*** (0.030)** (0.001)*** (0.000)*** (0.003)*** (0.004)*** (0.031)** (0.001)*** (0.001)*** (0.001)***

Number of R&D personnel in firms 0.275 0.241 0.275 0.284 0.294 0.270 0.276 0.280 0.280 0.281

(0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)***


(0.193)


(0.948)


(0.083)*


(0.237)

Number of computers 0.005

(0.664)

Ratio of technology trade 0.049

(0.638)


(0.637)

Share of FDI -0.011

(0.586)


(0.473)

Observations 31 31 31 31 31 31 31 31 31 31

R2 0.911 0.916 0.911 0.920 0.915 0.911 0.911 0.911 0.912 0.912

Determinants of Knowledge/InnovationPerformance: 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 (1) (2) (3) (4) (5) (6) (7) (8) (9)

Ratio of university graduates 0.044 0.038 0.046 0.040 0.043 0.042 0.040 0.041 0.035

(0.022)** (0.076)* (0.021)** (0.049)** (0.026)** (0.055)* (0.034)** (0.030)** (0.055)*

Number of R&D personnel in firms 0.119 0.108 0.120 0.126 0.119 0.117 0.123 0.123 0.123

(0.000)*** (0.002)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)***

Number of computers 0.032 0.030 0.030 0.033 0.034 0.030 0.044 0.038 0.047

(0.002)*** (0.005)*** (0.004)*** (0.002)*** (0.006)*** (0.015)** (0.002)*** (0.001)*** (0.000)***


(0.577)

Ratio of government expenditure on education 0.011

(0.579)


(0.554)


(0.763)

Number of telephones 0.001

(0.846)


(0.192)

Share of FDI -0.020

(0.265)


(0.057)*

Observations 31 31 31 31 31 31 31 31 31

R2 0.882 0.883 0.883 0.884 0.882 0.882 0.890 0.888 0.898

Knowledge/Innovation and Economic Growth: 1988-1993

No Knowledge/Innovation variables significant (1) (2) (3) (4) (5)

Coastal dummy 3.251 3.291 3.304 3.504 3.226 (0.016)** (0.013)** (0.022)** (0.009)*** (0.016)**

Illiteracy rate -0.065 -0.049 -0.078 -0.085 -0.073

(0.469) (0.580) (0.372) (0.315) (0.400)

Initial incom -1.941 -2.127 -1.753 -5.215 -2.342

(0.083)* (0.054)* (0.094)* (0.065)* (0.108)

Population growth -0.107 0.052 -0.221 -0.695 -0.042

(0.929) (0.965) (0.856) (0.567) (0.972)

Patents 0.577

(0.622)

Papers 0.945

(0.307)

New products -0.118

(0.882)

Start-ups 2.168

(0.180)

Knowledge/innovation performance 0.659

(0.549)

Observations 30 30 30 30 30

R2 0.336 0.358 0.329 0.378 0.339

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. (1) (2) (3) (4) (5) (6)

Coastal dummy 0.566 0.942 1.070 0.991 0.900 0.956

(0.170) (0.039)** (0.004)*** (0.020)** (0.018)** (0.013)**

Illiteracy rate -0.084 -0.056 -0.104 -0.091 -0.088 -0.086

(0.001)*** (0.041)** (0.000)*** (0.002)*** (0.000)*** (0.001)***

Initial income 0.066 0.016 0.051 0.066 0.056 0.051

(0.117) (0.729) (0.221) (0.193) (0.181) (0.223)

Population growth -1.448 -1.271 -0.899 -1.114 -1.150 -1.129

(0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)***

Patents 1.247

(0.003)***

Papers 0.959

(0.018)**

New products 0.673

(0.004)***

Start-ups 0.469

(0.021)**

Knowledge/innovation 0.788 0.711

performance (0.005)*** (0.010)***

Observations 31 31 31 31 31 31

R2 0.707 0.527 0.682 0.601 0.692 0.693

F-test (p-value) 0.000 0.000 0.000 0.000 0.000 0.000

Test of over identifying 0.90 0.58 0.48 0.94 0.45 0.66

restrictions (p-value)

OLS result 1.052 0.423 0.507 0.309 0.726 0.726

(0.002)*** (0.050)** (0.003)*** (0.087)* (0.004)*** (0.004)***

Robustness Test I: Innovation to Growth Control Var. Economic Policies (1997-2003)

(1) (2) (3) (4) (5) (6) (7) (8) (9)

0.379 0.690 0.427 0.407 0.947 0.673 0.736 1.113 0.953

(0.288) (0.047)** (0.199) (0.366) (0.027)** (0.117) (0.062)* (0.005)*** (0.015)**

-0.093 -0.106 -0.099 -0.090 -0.107 -0.095 -0.071 -0.100 -0.081

(0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.004)*** (0.001)*** (0.002)***

0.029 0.032 0.036 0.052 0.046 0.045 0.026 0.039 0.033

(0.417) (0.399) (0.308) (0.228) (0.302) (0.298) (0.580) (0.454) (0.508)

-1.643 -1.260 -1.535 -1.497 -0.945 -1.236 -1.336 -0.866 -1.099

(0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)***

0.655 1.165 1.213

(0.064)* (0.005)*** (0.002)***

0.484 0.676 0.683

(0.035)** (0.004)*** (0.004)***

0.591 0.778 0.862

(0.013)** (0.005)*** (0.004)***

0.036 0.028 0.036

(0.003)*** (0.035)** (0.002)***

0.058 0.032 0.062

(0.351) (0.631) (0.329)

-0.025 -0.008 -0.018

(0.259) (0.707) (0.417)

31 31 31 31 31 31 31 31 31

R2 0.799 0.765 0.797 0.721 0.685 0.705 0.727 0.682 0.698

0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000

0.89 0.85 0.29 0.75 0.52 0.54 0.75 0.56 0.85

0.775 0.329 0.548 1.017 0.484 0.701 1.183 0.513 0.776

(0.007)*** (0.037)** (0.009)*** (0.002)*** (0.006)*** (0.005)*** (0.001)*** (0.004)*** (0.003)***

performance

Patents

New products

Knowledge/innovation

population growth

Coastal dummy

Illiteracy rate

Initial income

Share of exports

Share of FDI

F-test (p-value)

OLS result

Observations

Test of over identifying


ownership

Share of state

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

(1997-2003)(1) (2) (3) (4) (5) (6) (7) (8) (9)

0.378 1.037 0.870 0.558 1.069 0.905 0.507 1.052 0.929

(0.354) (0.005)*** (0.018)** (0.182) (0.005)*** (0.019)** (0.246) (0.006)*** (0.016)**

-0.093 -0.112 -0.095 -0.079 -0.082 -0.074 -0.083 -0.104 -0.087

(0.000)*** (0.000)*** (0.000)*** (0.046)** (0.045)** (0.064)* (0.001)*** (0.000)*** (0.001)***

0.120 0.096 0.107 0.067 0.053 0.056 0.073 0.052 0.058

(0.025)** (0.066)* (0.041)** (0.120) (0.216) (0.187) (0.107) (0.222) (0.182)

-1.514 -0.852 -1.111 -1.461 -0.920 -1.168 -1.506 -0.904 -1.142

(0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)***

1.510 1.265 1.479

(0.000)*** (0.002)*** (0.010)***

0.735 0.713 0.679

(0.002)*** (0.004)*** (0.012)**

0.836 0.801 0.878

(0.003)*** (0.005)*** (0.020)**

0.411 0.419 0.491

(0.131) (0.136) (0.075)*

0.003 0.011 0.007

(0.855) (0.491) (0.654)

-0.0002 -0.0003 -0.0002

(0.527) (0.919) (0.602)

31 31 31 31 31 31 31 31 31

R2 0.714 0.701 0.733 0.706 0.682 0.695 0.698 0.681 0.695

0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000

0.82 0..58 0.12 0.91 0.58 0.37 0.83 0.29 0.39

1.118 0.544 0.850 1.055 0.522 0.742 1.081 0.469 0.810

(0.001)*** (0.002)*** (0.001)*** (0.002)*** (0.003)*** (0.004)*** (0.006)*** (0.011)** (0.013)**

performance

Population density

population growth

Coastal dummy

Illiteracy rate

Initial income

Patents

New products


Amount of railways

Amount of road

F-test (p-value)

OLS result

Observations



Sensitivity Tests: Innovation to Economic Growth (1997-2003)Different sample periods & proxy for the economic growth to test sensitivity. Household consumption is used as proxy (Beck & Laeven, 2004).

(1) (2) (3) (4) (5) (6) (7) (8) (9)

0.305 0.866 0.617 0.631 1.081 0.941 0.958 1.365 1.208

(0.443) (0.012)** (0.079)* (0.163) (0.007)*** (0.025)** (0.005)*** (0.000)*** (0.000)***

-0.062 -0.087 -0.069 -0.093 -0.109 -0.096 -0.088 -0.103 -0.089

(0.006)*** (0.001)*** (0.003)*** (0.000)*** (0.000)*** (0.001)*** (0.005)*** (0.003)*** (0.006)***

0.094 0.080 0.090 0.046 0.031 0.035 -0.045 -0.108 0.084

(0.025)** (0.051)* (0.028)** (0.314) (0.481) (0.441) (0.800) (0.568) (0.653)

-1.459 -0.817 -1.141 -1.483 -1.000 -1.215 -0.534 -0.043 -0.291

(0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.037)** (0.835) (0.195)

1.452 1.099 1.137

(0.001)*** (0.012)** (0.001)***

0.830 0.584 0.670

(0.000)*** (0.018)** (0.003)***

1.025 0.673 0.787

(0.000)*** (0.024)** (0.003)***

31 31 31 31 31 31 31 31 31

R2 0.716 0.701 0.718 0.674 0.648 0.646 0.723 0.686 0.695

0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000

0.58 0.87 0.53 0.89 0.37 0.58 0.66 0.51 0.40

1.199 0.613 0.882 0.999 0.467 0.648 1.104 0.534 0.747

(0.000)*** (0.000)*** (0.000)*** (0.005)*** (0.011)** (0.016)** (0.001)*** (0.002)*** (0.002)***

New products

F-test (p-value)

OLS result

Observations




performance

1996~2003 1998~2003 Household consumption growth

Patents

population growth

Coastal dummy

Illiteracy rate

Initial income

Conclusion

• Analyzed the changing determinants of economic growth in China: cross-province regressions

• For (1988-1993), 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 (1997-2003), 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

Thank You

Changing Engines of Growth in China: From FDI and Privatization to Innovation and Knowledge Furong...

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