Exporting and Innovation: Theory and Firm-Level Evidence from the People’s Republic of China

Date: May 2013
Type: Papers and Briefs
Country:
Subject:
Series: Regional Economic Integration Working Papers
Author: Tang, Hsiao Chink; Lin, Faqin

Description

This paper investigates how exporting affects firm innovation using firm-level data from the People’s Republic of China (PRC). Stylized facts show that exporters are more productive and more innovative than nonexporters. However, the causal direction between exporting, innovation, and productivity remains unsettled. If exporting increases a firm’s innovative activity, it will also increase the firm’s productivity, which benefits the firm—by extension, the economy—in the long-run. The purpose of this paper is, therefore, to find out whether exporting does contribute to firm innovation in the PRC.

Findings

By embedding innovation in a firm heterogeneity model, the paper shows that firm innovation is impacted by both productivity and export status. Compared with non-exporters, exporters’ research and development (R&D) intensity is higher by 5%, R&D level by 33%, and exporters are also 4% more likely to invest in R&D.

These results provide policy suggestions on three key areas.

First, given that exporting helps innovation, further efforts to deepen trade liberalizations and facilitate domestic firms to enter international markets would be advantageous.

Second, better protection of intellectual property rights especially in the area of enforcement should be considered.

Third, processing exports do not really foster innovation, which can be explained by the technology gap theory. Therefore, policy makers should seek to upgrade the structure of trade by increasing the amount of non-processing exports produced by domestic firms.

In particular, the growth and exporting activities of private domestic firms should be facilitated. These firms comprise the backbone of the PRC’s employment base and industrial output and they add more domestic value to exports than foreign-affiliated or state-owned firms. Given the unfavorable economic and financial treatment they continue to face vis-à-vis state-owned firms, policies that encourage exporting–innovation effects can easily be introduced to reap the benefits of higher productivity to sustain economic growth.

However, this process should be encouraged to evolve gradually because the processing sectors have traditionally provided jobs for much of the PRC’s massive labor force, thus maintaining social and political stability.

Contents

  • Introduction
  • Brief Literature Review
  • Stylized Facts
  • Theoretical Model
    • Consumer Problem
    • Producer Problem
    • Equilibrium
  • Empirical Investigation
    • Specification and Firm Productivity
    • OLS Results
    • Endogeneity and Matching Estimation
  • Conclusions
  • References