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From “Made in China” to “Innovated in China”:Necessity, Prospect, and Challenges
Shang-Jin Wei
Based on joint research with Zhuan Xie and Xiaobo Zhang
Prepared for a special issue of Journal of Economic Perspective
1
• China matters for the world
– China and US macro-economy
• Low interest rate and housing bubble
• The rise of Donald Trump?
– Neglected positive side
• Higher living standard due to trading with China
• Faster growth across the world due in part to the rise of China
2
China’s (past) growth has been spectacular
$714,1980
$3,644,2000
$13,277,2015
$1,297,1980
$2,547,2000
$5,799,2015
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Real per capita GDP
China
India
10.2
8.7
5.7
5.6
5.0
4.9
4.5
4.4
4.2
4.2
0 2 4 6 8 10 12
Equatorial Guinea
China
Bhutan
Korea
Vietnam
Maldives
Taiwan
India
Sudan
Sri Lanka
Average real per capita GDP growth, 1980-2015
3
Note: Figures in 2011 PPP.Source: ADB calculations from WEO April 2016.
Note: Figures in 2011 PPP.Source: ADB calculations from WEO April 2016.
4
Notes: Figures in 2011 PPP. Excluding outliers: Liberia and Equatorial Guinea
CHN
KOR
BTN
THA
TON
TWN
KNA
SGP
IDNBWAHKG
MUS
VNM
LCAATG
MYS
OMN
MDV
CYPBLZDMALUXVCT
LKA
SWZMLT
IND
JPN
CHL
IRL
LAOCPV
PRTPRIPAKNOR
NPLGRD
TURGBRISRSYCESP
EGY
DNKUSA
ITA
COLDEU
LSO
AUT
JAM
NLDAUSBEL
SWE
FRAFJI
TUNBGD
FINURYNZL
TCD
CAN
BFAMARUGA
PNG
SLV
DOM
GNB
ISL
CHE
GHA
PRYCOG
CRIMLI
PAN
SLBKWT
VUT
GUY
CAF
HUN
BHR
TZA
GRC
ZWE
KEN
POL
ECUBRA
BHS
BRBHND
COM
SDN
MEX
GAB
BDI
ROU
SEN
PHL
MOZ
GTM
BGR
MRTDZA
BEN
PER
ALB
MWI
JORIRN
VEN
ZAFBOL
NAM
CMR
LBN
GMB
ETHSLE
TGO
KIRCIV
TTO
NGARWAIRQ
MDG
SUR
NIC
HTIBRN
STP
ZMB
ARE
NER
SAU
QAT
LBY
-5
05
10
199
5-2
01
0
-5 0 5 101980-1995
Source: WEO
Real per capita GDP growth rate
2
4
6
8
10
12
14
16
19
81
19
84
19
87
19
90
19
93
19
96
19
99
20
02
20
05
20
08
20
11
20
14
20
17
Chinese growth rate (%)Source: WEO
Per capita GDP
GDP
Some numbers to put things in perspective
• Average real per capita GDP growth of 8.7% during 1980–2015
• Real per capita GDP increased from $714 in 1980 to $13,277 in 2015
• Only Equatorial Guinea has exceeded China’s performance
• Real per capita GDP growth of more than 6% for 25 consecutive years from 1990–2015
5
Note: Figures in 2011 PPP.
Reasons for the growth success (1)
• Policy actions
• Economic fundamentals
6
Reasons for the growth success (2)
• Policy actions– Embracing market oriented reforms
• Agriculture -“household responsibility system”• Industry and service
– “grasp the large and let go of the small”– Lower entry barriers
– Embracing globalization• “Democratization” of trading rights• Openness to FDI• Accession to the WTO
– Minimizing resistance• Dual track system• Special economic zones• Political centralization + economic decentralization
7
Reasons for the growth success (3)
Economic Fundamentals:
low wage + favorable demographics
8
0
20
40
60
80
100
120
1980 1990 2000 2010 2016
Rank of real per capita GDP among 138 non-OECD countries
Indonesia
Brazil
Vietnam
Philippines
Bangladesh
Nigeria
China
India
48
52
56
60
64
68
72
1980 1990 2000 2010 2016
Share of working age cohort (15-59) in population (%)
China
India
Indonesia
Brazil
Vietnam
Philippines
Bangladesh
Nigeria
Note: Figures in 2011 PPP.Source: ADB calculations from WEO April 2016.
Source: Haver Analytics.
Rio Olympics opening ceremony
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Beijing Olympics opening ceremony
10
Chinese factories: Past and present
11
Growth rate of GDP and TFP
-0.04
-0.02
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
GDP TFP
Let capital share=0.5
TFP
13Capital and workers as input. The parameters are different capital income share.
-0.04
-0.02
0
0.02
0.04
0.06
0.08
0.1
0.12
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
0.35 0.4 0.45 0.5
TFP (adjusting for schooling of labor force)
14Capital and number of workers, average years of education as input.
-0.06
-0.04
-0.02
0
0.02
0.04
0.06
0.08
0.1
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
0.35 0.4 0.45 0.5
Contribution of K,L and TFP
15
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
1.2
1.4
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
K L TFP
Capital share is 0.5
Contribution of K,H and TFP
16
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
K H TFP
H= education* L. Capital share is 0.5.
Growth is likely to moderate further
• Due to cyclical (weak global economy) and structural factors (rising wages, shrinking workforce)
• Changes to postpone retirement age, increase female labor force participation, and relax family planning policy will not reverse the trend in the short-run
• Future growth must mainly come from labor productivity growth
17
• Can the transition from “made in China” to “innovated in China” happen?
18
If you want to look reasons to say no, you can find them
19
If you wish to look for optimistic examples,
you can find them too.
WeChat’s world
20
Uber gives app
21
“China’s Launch of Quantum Satellite Major Step in Space
Technology,” New York Times Aug 6, 2016
22
What do the systematic data say?
• What is the actual growth of innovation of China’s firms?
• What accounts for the relatively fast pace of innovation (as measured by patent applications and approvals) by Chinese firms?
• Is there possible resource misallocation in the innovation space?
23
R&D to GDP
24
R&D/GDP vs GDP per capita
25
Note: data for China are from 1995to 2014, and data for all other countries are for 2014
or the latest year available. Source: OECD database and World Bank.
Number of Chinese patents has exploded
0
500
1,000
1,500
2,000
2,500
0%
20%
40%
60%
80%
100%1
99
5
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
Tho
usa
nd
s
Shar
e t
o t
ota
l
Chinese patent applications
Invention (%) Utility model (%)
Design (%) Total domestic applications (RHS)
26
What explains China’s innovation growth
– Easy approval?
– Government subsidies?
– Taking advantage of expanding market opportunities
– Spurred by rising wages?
27
Patent approval rate is not unusually high
Patent Approval Rate in BRIC Countries, the Republic of Korea, and the U.S.
28
Invention patents in the US show a rising trend
29
Invention Patents Granted in USPTO by Different Countries
Growing patent citations indicate quality improvements
30
Citations on Invention Patents Granted by USPTO: Cross-country Comparison
• What drives the rising pace of innovation?
• Statistical analysis
31
Key results
• Firm size is (+) associated with # of patents
• Export firms are more innovative
• Lower (foreign) tariffs are good for innovation
• Invention patents respond (+) to subsidies
• High tax rate discourages innovation
• Higher cost of capital discourages innovation
• Robust (+) relationship between wages and innovation
32
The innovation gap with leading countries is still wide
33
Note: data for China are from 1995to 2014, and data for all other countries are for 2014
or the latest year available. Source: OECD database and World Bank.
SOEs are granted more subsidie
34
Ratio of Subsidies to Sales by Firm Ownership and Size
…but lag behind private firms in patent generation
35
0
20
40
60
80
100
120
140
160
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Tho
usa
nd
s
Shar
e t
o t
ota
l
Domestically granted patents
Private firms (%) State-owned firms (%) Foreign firms (%) Total (RHS)
SOE R&D resources not as efficiently spent
36
Variables Total Invention Utility model Design
R&D (log)*FIE -0.006 -0.006 0.002 -0.014**
R&D (log)*SOE -0.010** -0.017** -0.004 -0.014
R&D (log) 0.016*** 0.016*** 0.013*** 0.013***
Sales (log) 0.278*** 0.314*** 0.259*** 0.305***
Constant -5.558*** -7.135*** -4.979*** -6.414***
Observations 783,229 783,229 783,229 783,229
Firm FE YES YES YES YES
Year FE YES YES YES YES
AIC 298065 92655 190331 134819
Impact of R&D on Patent Output
Have R&D data only during 2005-2007.
Summary• The fortune of the Chinese economy matters for the
Americans and the world
• The Chinese economy fortune is at crossroads
• Can Chinese firms really innovate?
– Patent application
– Patent forward citations
• Drivers of firm innovation:
– (i) world market opportunities; (ii) rising labor costs
• Gap with the US, Japan, and even Korea is still huge
• Possible misallocation
– Subsidy allocation biased in favor of SOEs, but private firms innovate more
– Structural reforms that level the playing field can accelerate innovations
37