Innovation Fact of the Week: Private Firms in China Capture 30 Percent Higher Returns from R&D Investments Than State-Owned Firms

John Wu September 23, 2016
September 23, 2016

Innovation drives productivity growth. Because of that, China has rapidly increased its levels of R&D investment. In 2000, China invested just under 1 percent of its GDP in R&D. By 2013, the figure had doubled to a bit more than 2 percent. But what types of Chinese firms generate the most efficient R&D investment returns to the Chinese economy?

Three economists analyzed R&D investments by privately owned and state-owned firms in China between 2001 and 2011. They found that privately owned firms achieved an additional 0.16¥ in output for every yuan they invested in R&D, while state-owned firms created only 0.12¥ more output—a difference of approximately 30 percent. In explaining their findings, the economists suggest that private firms have to innovate more effectively in order to secure their position in highly competitive markets, while state-owned firms operate in markets with less competition and higher barriers to entry.