R&D Misallocation in China

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HKUST IEMS Academic Seminar
Michael Zheng Song (The Chinese University of Hong Kong)
5 May 2016 (Thursday)
12:00 am
IAS2042, 2/F, Lo Ka Chung Building, Lee Shau Kee Campus, HKUST

Key insights

China’s R&D expenditure has been growing very rapidly over the past two decades. It remains unclear to what extent R&D resources are misallocated and welfare losses can be caused by R&D misallocation. Zheng (Michael) Song, Professor of Economics at Chinese University of Hong Kong addressed this question and introduced a new theoretical framework to better uncover misallocation by incorporating innovation and imitation decisions at the firm level. 

The mechanism that sorts innovation by the distance to frontier becomes a key to identify R&D misallocation. Using China’s industrial firm survey data from 2001 to 2007, Prof Song demonstrated this sorting mechanism was weak, suggesting that China has experienced severe misallocation of R&D resources during the time frame under study. According to Prof Song’s analysis, R&D misallocation lowered China’s aggregate total factor productivity growth by 1-2% per annum. On a brighter note, Prof Song presented evidence that the efficiency of R&D allocation improved somewhat between 2001 and 2007. 

Abstract 

China's R&D expenditure has been growing very rapidly over the past two decades. It remains unclear to what extent R&D resources are misallocated and how big welfare losses can be caused by R&D misallocation. We first develop a theoretical framework that incorporates innovation and imitation decisions at the firm level. The mechanism that sorts innovation by the distance to frontier becomes a key to identify R&D misallocation. Using China's industrial firms survey data from 2001 to 2007, we show that (i) the sorting mechanism is weak, suggesting severe misallocation of R&D resources; (ii) there is evidence that the efficiency of allocation improves between 2001 and 2007. We also find that R&D misallocation can lower aggregate TFP growth by 1-2 percent.

About the Speaker

Zheng (Michael) Song is a professor at the department of economics, Chinese University of Hong Kong (CUHK). Before joining CUHK, he was an associate professor of economics at Chicago Booth. His research focuses on Chinese economy and macroeconomics. His papers appear on leading academic journals including American Economic Review and Econometrica. In 2013, he won Sunyefang Economic Science Award, the highest economics award in China. Prof. Song got PhD from Institute of International Economic Studies at Stockholm University.

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