From Imitation to Innovation: Where Is all that Chinese R&D Going?
We construct a model of firm dynamics with heterogeneous productivity and distortions. The productivity distribution evolves endogenously as the result of the decisions of firms seeking to upgrade their productivity over time. Firms can adopt two strategies toward that end: imitation and innovation. The theory bears predictions about the evolution of the productivity distribution. We structurally estimate the stationary state of the dynamic model targeting moments of the empirical distribution of R&D and TFP growth in China during the period 2007--2012. The estimated model fits the Chinese data well. We compare the estimates with those obtained using data for Taiwan and find the results to be robust. We perform counterfactuals to study the effect of alternative policies. We find large effects of R&D misallocation on long-run growth.
We thank Joe Altonji, Ufuk Akcigit, Manuel Amador, Marco Bassetto, Chang-Tai Hsieh, Chad Jones, Patrick Kehoe, Juan Pablo Nicolini, Jesse Perla, Torsten Persson, Chris Tonetti, Daniel Xu, Gianluca Violante, and seminar participants at the ASSA Annual Meeting 2019, the Bank of Canada-IMF-University of Toronto Meeting on the Chinese Economy, Cambridge University, CIFAR, the Federal Reserve of Minneapolis, the National University of Singapore, New York University, Princeton University, Stanford University, Tsinghua University, the University of California at Berkeley, the University of Chicago, University College London, the University of Notre Dame, University of St. Andrews, and Yale University. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.