Innovation and Productivity – Evidence from China Jingying Xu, Prof. Andreas Waldkirch Department of Economics ABSTRACT BACKGROUND STRATEGIES CONCLUSION ACKNOWLEDGMENTS  The author would like to thank  Professor Andreas Waldkirch for all of his support throughout the research process  Professor Daniel LaFave for being the second reader  Special thanks to Survey Research Center, Institute for Advanced Research, Shanghai University of Finance and Economics, 777 Guoding Rd, Shanghai, PRC, for providing the online database.  Innovation ability, measured as the ratio of new product output to total output, has a significant and positive effect on productivity for all types of firms.  HTM presence in a sector has a significantly positive effect on both TFP and LP for all firms.  Spillover effect --- domestic firms are positively affected by the presence of HTM-affiliated firms in a sector.  However, there exists a negative competition effect that partially offsets the positive productivity effect of innovation and spillover effect from foreign & HMT ownership.  Coefficient sign change after switching from industry fixed effects to firm fixed effects indicates that it is important to take firm-level heterogeneity in to account. This paper investigates a lesser-known effect of innovation on the productivity of manufacturing firms in China using data covers more than 330,000 firms across 40 sectors from 1998 to Innovation plays a key role in the productivity of firms and it matters for all types of firms, new as well as established. The ratio of new products output to the firm’s total output is used to measure innovation ability in this paper. A higher ratio is expected to have a positive impact since new products are likely to be differentiated than old products’ from other firms’ goods, which allows for a higher make-up and thus greater profits. Comparisons are conducted for different types of firms, such as: domestic firms, foreign firms and Hong Kong, Macau, Taiwan-affiliated firms. We also implement different measures of productivity, such as: total factor productivity and labor productivity. After controlling for a number of factors, we find a significantly positive relationship between innovation and productivity across all types of firms. METHODS How to Measure Innovation?  Innovation Inputs: R&D Expenditure, Patent Counts --- Doesn’t capture the effectiveness of the effort or only capture part of the investments  Innovation Outputs: Geroski,Machin and Reenen (1993 first propose the conceptual idea. Hall (2011) suggests that future research should use new product sales to measure innovation. In this paper, we proposed to use RIA(Revealed Innovation Ability) to measure innovation output: new products output/total output. RIA represents a firm’s innovation ability. A higher RIA is expected to have positive impact on firm’s productivity since new products are likely to be more differentiated than old products from other firms’ goods, which allows for a higher mark-up and thus greater profits.  tfp: log value of TFP, calculated using the Levinsohn and Petrin (2003) methodology with: labor, capital, materials as inputs and sales as output  INNOV_firm: new product share in firm i at year t  FDI_firm: foreign capital share in firm i at year t  FDI_sector: foreign capital share averaged over all firms in a sector, weighted by each firm’s output share  Fixed effects: sector/firm FE, year FE, location FE I. Total Factor Productivity: II. Labor Productivity:  lp: log value of value added per worker  kl: log value of capital labor ratio  k: log value of capital RESULTS Innovation and TFP Innovation and LP