Firms’ Innovation Activities in Developing China : The Roles of Productivity and More

This paper empirically studies the roles of productivity and other factors such as globalization and financial constraints in shaping the innovation-related activities of Chinese firms between 2005 and 2007, in a context of quickly developing economy. Our empirical analysis based on firm-level data shows that productivity greatly spurs innovation investments but surprisingly reduces innovation outputs. Upon further investigation, we find that globalization importantly explains this contradictive finding. The negative effect of productivity only exists among the non-exporters or mainland-owned firms in China; firms that are exporting or owned by non-mainland-China capitals spend more on R&D and develop more new products when becoming more productive. Additionally, financial constraints significantly reduce firms’ innovation expenditures and outcomes; they also dampen the positive effect of productivity on innovation investments but intensify the negative effect of productivity on innovation outcomes. Other characteristics such as size and registration levels also cast significant influences on Chinese firms’ innovation activities