China's Dual Innovation Economy : Evidence from Large and Medium-Sized Chinese Manufacturing Firms

We investigate the role of the state in the R&D intensification of China’s manufacturing industries. Using a data set that spans the population of large and medium-sized Chinese manufacturing firms from 2007 to 2016, we find evidence of two distinct models of technological innovation in China: state-owned enterprises invest heavily in R&D and actively seek patents, which are not related to their economic performance; non-state-owned enterprises have been narrowing the gap with the state-owned enterprises in R&D spending, which boosts their economic performance, but these enterprises lag behind state-owned enterprises in patenting. The non-state model has seen its share of China’s R&D spending increasing at the expense of the state model, and government grants for firm R&D are partial to obtaining patents. All of this has taken place as Chinese manufacturing industries are becoming more competitive and less export-oriented