Demand Forces of Technical Change Evidence from the Chinese Manufacturing Industry

This paper investigates the effect of market size on innovation activities across different durable good industries in the Chinese manufacturing sector. We use a potential market size measure driven only by changes in the Chinese income distribution which is exogenous to changes in prices and qualities of durable goods to instrument for actual future market size. Results indicate that an increase in market size by one percentage point leads to an increase of 4.4% in R&D inputs, an increase in labour productivity by 6.5% and an increase in the likelihood of a successful product innovation by about 1.1 percentage points. These findings are robust controlling for export behaviour of firms and supply side drivers of R&D.