Innovation and firm performance in the People's Republic of China: A structural approach with spillovers

This paper adopts a structural framework to study the process of indigenous innovation and its impact on firm performance in the People's Republic of China (PRC). Informing the analysis is an unusually rich source of panel data comprising almost 70,000 private Chinese firms operating in the PRC from 2004 to 2007. Relying on a structural innovation framework, the focus is on estimating the effects of technological learning during each phase of the structural model: (i) the firm's decision to innovate; (ii) the innovation effort; (iii) the innovation throughput; and (iv) the firm performance. The results show that, in the early stages of innovation, Chinese firms fail to incorporate learning spillovers into their innovation effort, even when considering their absorptive capacity. Conversely, the study finds that, in the later stages of innovation, learning spillovers positively increase firms' innovation output as well as their performance, especially for firms with high absorptive capacity.