Do Exporting Firms in the People’s Republic of China Innovate?

With international trade spluttering amidst the Great Recession, there is renewed interest in the
factors driving firm-level export performance in Asia’s super exporter—The People’s Republic of
China (PRC). While early studies suggested that innovation was important, there has been little
research on opening up the black box of technology at firm-level in the PRC. This paper
undertakes econometric analysis of innovation, learning, and exporting in automobiles and
electronics firms in the PRC using a large-scale dataset to identify the most appropriate
innovation proxy. Drawing on recent literature on innovation and learning in developing
countries, it tests two alternative proxies: (i) a technology index (TI) to capture a variety of minor
activities involved in using imported technologies efficiently; and (ii) the research and
development (R&D)-to-sales ratio, which represents formal technological efforts to create new
products and processes, often at world frontiers. A higher TI (representing minor technological
activities) increases the probability of exporting in both industries, while the R&D-to-sales ratio
was not significant. Foreign ownership, technical manpower, and the characteristics of the
general manager/chief executive officer also matter. The findings suggest that the PRC’s
remarkable success in the export of automobiles and electronics since initiating an open-door
foreign direct investment (FDI) policy in 1978 is linked to technology transfer from
multinationals; systematic investments in and upgrading of minor technological activities (like
search, engineering, quality management, and design); and human capital. As the PRC’s per
capita income rises over time, however, formal R&D activities are likely to become more
important to sustain competitiveness and technological upgrading in automobiles and
electronics.