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 ACE International Conference Hong Kong, December 2006

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 (-) impact of bigger state sector ( + impact of privatization) (- or + ) impact of the initial income level -> convergence or divergence Nothing on the changing sources of growth, especially with the rising importance of innovation & knowledge Debate about the impact of FDI in China

Data and Descriptive Statistics China’s Provincial Data: 31 provinces, & Source: China Statistical Yearbook on Science and Technology, China Statistical Yearbook

Methodology: Cross-Province Analysis Y: Economic Growth: per capita income growth rates T: Variables of our interests (policies and knowledge) X: Control Variables (initial income, population growth, literacy, coastal dummy) OLS and 2-stage LS to check for possible endogeneity of T variables (instrument variables)

Policies and Economic Growth Rather, economic policy variables had significant impacts on growth. Exports and Foreign Direct Investment: + vs. ratio of State ownership: -

Changing Engines of Economic Growth : Basic Regression, vs Coastal dummy: + over both periods, Illiteracy rate and Population growth: - over the later period Initial income: - over the earlier period

Policies and Economic Growth 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.

Methodology: Cross-Provincial Analysis 1 st stage: Knowledge/Innovation Performance Equation 2 nd stage: Economic Growth Equation : Knowledge/Innovation Performance : Instrumental Variables : Exogenous Variables : Economic Growth : Predicted Value of Knowledge/Innovation Performance : Exogenous Variables Two-Stage Least Squares

5 Indicators of Knowledge/Innovation Performance INDICATO R COMPONENTSIVs 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 INDICATORCOMPONENTSIVs Start-ups 1)an increase in the number of newly registered firms 2)an increase in the number of newly registered firms 1)Ratio of university graduates 2)No. of R&D personnel in firms Combined Knowledge/ innovation Indicator after summing up the above four indicators, then divide it by 4 1)No. Of university graduates 2)No. of R&D personnel in firms 3)No. of computers

Knowledge/Innovation and Economic Growth No Knowledge/Innovation variables significant

Knowledge/Innovation and Economic Growth 1997 –2003 (IV regressions) 1)Now, Knowledge/Innovation variables and illiteracy become significant. 2) Initial income lost significance or positive -> rising equality.

Determinants of Knowledge/Innovation Performance: 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

Robustness Test I: Innovation to Growth Control Var. Economic Policies Economic policies variables are controlled for to test its robustness. The result indicates that knowledge/innovation performances are crucial for the economic growth even after controlling for economic policies variables. Indeed, export among other economic policies turned out to be an effective policy.

Robustness Test II: Innovation to Growth Control Var. Infrastructure Basic facilities variables are controlled for to test its robustness. The result indicates that knowledge/innovation performances are crucial for the economic growth even after controlling for basic facilities. No basic facilities except for the amount of railways in (3) turned out to be insignificant.

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

Conclusions Analyzed the changing determinants of economic growth in China: cross-province regressions For ( ), 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 ( ), Knowledge/Innovation performance turned to be crucial determinants; Knowledge/innovation performance : patents, papers, new products, start ups. Only Exports, among other economic variables, were confirmed its significance. Its robustness/Sensitivity were confirmed.

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.

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

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

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