R&D Efficiency in China: Can State-owned Firms Compete?

University essay from Lunds universitet/Ekonomisk-historiska institutionen

Abstract: Can state-owned firms’ R&D compete with that of more nimble private and foreign innovator firms? This paper analyzes R&D efficiency in China’s high tech industries (i) theoretically, based on previous studies, and (ii) empirically, through Data Envelopment Analysis under both Constant and Variable Returns to Scale. Though Chinese state-owned firms can theoretically be R&D efficient in industries where the underlying science is well understood, a myriad of factors including persistent soft budget constraints and policy burdens mitigate the potential advantages – bureaucratic pre-screening and access to finance – that characterize state-owned firms. Using Chinese national statistics on high-tech industries, foreign firms are found to be R&D scale-efficient in the medical, aerospace, and computer industries. Private Chinese firms are shown to be scale efficient in computers and electronics. Though generally the least efficient of the firm types, state-owned firms are more efficient in aerospace than other domestic Chinese firms, showing that state-owned firms can be moderately efficient in some industries. The findings of this paper lend support to the notion that SOEs are inefficient and that privatization and competition stimulate innovation.

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