Marketization and the Efficiency of Regional Innovation Systems in China

1. Meng-chun Liu and Zhou Xiaoyan 9/10/2014 Marketization and the Efficiency of Regional Innovation Systems in China

2. Outlines Introduction Overview of RIS and Regional Marketization in China Reform of S&T System and Landscape of RIS Marketization and RIS Knowledge Production Function for Measuring RIS efficiencies in China Knowledge Production Function Empirical results and discussion Conclusion

3. Introduction Innovation activities and resources are not evenly distributed over space but tend to be clustered in certain regions. Based on the framework of RIS, these locational advantages stand out considerably with regard to their ‘innovative efficiency.’ Innovation is a social economic phenomenon, through the cooperation and interaction between enterprises and other organizations or individuals.

4. Cooperation in KnowledgeMatters Geographical proximity and the specific institutional environment determinantsof cooperation and interaction across personnel and organizations a portion of knowledge is tacit in nature and can only bear the best effect through face-to-face interaction between people.

5. Regional Innovation Capabilities Based on the experience of the advanced world, some determinants of regional innovation capabilities were identified. Science-technology relationships (STRs) act as the core of each regional innovative performance. At the regional level, the contribution of university knowledge R&D to patenting may also be significant (Acs, Audretsch & Feldman, 1991; Jaffe, 1989). The role of small, innovative, firms embedded within regionally cooperative networks(Piore and Sabel, 1984; Saxenian,1994) . A densely networked and flexible organization, with free information sharing is critical for raising a region’s locational advantage. Regional supportive infrastructure or knowledge generation subsystem consists of public and private research laboratories, vocational training organizations, etc .

6. Research Motivations Some research has performed a systematic interregional comparison and a quantitative approach to look at the issue. These works mainly took the experience from advanced world . We know only very little about the case from a developing high-profile economy, China. Especially in the 1990s, the science and technology system has been restructured for bridging the gap between science and industries. Marking the S&T reform, the R&D by industry sector instead of public R&D institutes has taken the important role. This may imply that marketization matters in innovation capabilities in some way. The paper intends to examine the effect of marketization on RIS efficiency .

7. Purposes of the Paper The paper aims to explore the efficiency of regional innovation systems in China with the framework of regional a knowledge productivity function. The R&D employment and R&D capital stock are considered as the knowledge inputs and patents to be measured as knowledge outputs. We examine the roles played by regional marketization as well as the higher education system (universities), state-owned enterprises, and FDI in determining regional knowledge production efficiency. By drawing on panel data for 31 provinces and municipal cities for 2000-2005.

8. Overview of RIS and Regional Marketization in China

9. Reform of S&T System Prior to the economic reforms, the highly centralized system of innovation featured China’s research capabilities as being concentrated within government institutions. In pursue of the sustainability of broad-based productivity growth and living standard improving, China exhibited a rapid shift in S&T system by sourcing innovation resources that increasingly lie outside the state sector and developing a broad-based set of research capabilities during the reform period.

10. Reform of S&T System toward Market-oriented With the acceleration of ownership restructuring in the latter half of the 1990s, these conditions had either changed dramatically or were on the path toward fundamental change by the year 2000. During this period, the majority of enterprise-funded R&D took place outside of the state-owned R&D institutes following the ownership restructuring. As a result, the enterprise sector acts the major role of innovation. To indicate how far China has come in this regard, 60 percent of the country’s R&D spending was funded by the enterprise sector in the year 2000. Over the same period, the foreign sector also plays an extensive role.Foreign-funded R&D, and technology imports have facilitated the emergence of technology transfers.

11. Reform of the China’s S&T system During the socialist-era, invention in China’s science and technology (S&T) system was treated as a public good. It was unnecessary for developing patent laws, royalties, and courts, for the creation and protection of intellectual property rights. In the 1990s, the Chinese S&T system was accelerated by accession to WTO in 2001 and cross-border technology cooperation, improvement of corporate governance, as well as further reforms of the university and public research sectors and legal system for the protection of intellectual property rights.

12. Geographical Dimensions of China’s RIS The region of China’s RIS is not limited to intra-areas within provinces but also goes across. The sizes of these regions are more or less equivalent to Germany, France or the U.K. in terms of scale. Since China had been under planned economy for quite a long time, the assessment of social or economic development was conducted in each administrative area. The policy implementation and political achievement assessment were all done within each administrative area and seldom across the areas. Simply, China’s RIS can be regarded as provinces, municipal cities or autonomous regions.

13. Performance of RIS In general, the Bohai Rim, Yangtze River Delta, and Pearl River Delta share some 65-70% of China’s patents. An indicator for patent outputs per R&D worker may stand for knowledge productivity. Based on statistical data from “China Statistical Yearbook on Science and Technology,” The patent outputs per R&D worker over the period of 2000-05. Over the period, both Pearl River delta and Yangtze River delta still outperform other regions in terms of patent productivity. In spite of enjoying higher human capital and innovation resource, Bohai Rim has weaker performance in the knowledge productivity.

14. Numbers of Patents per R&D worker in China (2000-05)

15. Landscape of RIS Marketization matters in regional innovation capabilities in China. Enterprises in coastal areas have established a more flexible innovation system, making enterprises the main body of technology innovation. The landscape of regional innovation capacities in China demonstrates a ladder-like tendency from the east to the west. The innovation capacity of coastal areas in eastern China is superior to that of provinces in the middle areas and the western inland area. Enterprises in coastal areas have established a more flexible innovation system, and the market economy operates well, making enterprises the main body of technology innovation.

16. Marketization and RIS Marketization acts as the core of regional innovation capabilities. Industrial clusters, as a branch of RIS, create efficient synergy inside a region through interactions of various business factors. And becoming a learning region is a prerequisite of RIS. S&T industrial parks, university science parks and technology business incubators act as new infrastructures to encourage industry-science relationships, and spin-offs from public research organizations (PROs) have started to fill the gaps within the national innovation system. Keen competition across many industries resulted in the erosion of profit margins and motivated many enterprises to search for new process and product innovations for survival in regards to continuing wage increases.

17. Knowledge Production Function for Measuring RIS efficiencies in China

18. Knowledge Production Function Based on Griliches-Acs-Jaffe’s research framework (Griliches, 1990; Acs, 2002; Jaffe, 2000), we model the knowledge production function as follows: MKT, the degree of regional marketization, is obtained from Fan, Wang and Zhang (2007).

19. Definitions of Variables Note: (a): China Statistical Yearbook on Science and Technology; (b): China Statistical Yearbook; (c): China Industry Economy Statistical Yearbook. Number of observations: 186.

20. Dynamic Regression Model Setting In the model specification, dynamic panel models include lagged dependent variables and unobserved individual-specific effects. The models are powerful because they allow for empirical modeling of dynamics while accounting for individual-specific dynamics. Such models are able to examine the dynamic effect, whether past behavior significantly directly affects current behavior. In consideration of the adopted panel data for small time dimension, the Arellano-Bond estimator is now widely used because the first-differenced simple and generalized methods of moments (GMM) are adopted for estimation.

21. Empirical Results

22. Conclusion (1) Against the background of China’s science and technology system reform in the 1990s, industry sectors instead of public R&D institutes act as the main bodies engaging in innovation. In some ways, marketization matters in innovation capabilities. However, less effort is made to more systematically examine the role of marketization in RIS efficiency. By taking China as a case study, the research intends to enrich the literature on the regional innovation capabilities by underlying the role played by the advances in marketization.

23. Conclusion (2) By employing a knowledge production function and data for 31 provinces and cities for 2000-2005, this study aims to quantitatively examine the hypothesis within the framework of a regional knowledge production function. In the equation, variables related to the higher education system, the state-owned sector, and the foreign enterprise sector in a region are considered. The R&D employment and R&D capital stock are regarded as the knowledge inputs, and the number of patents is treated as the knowledge outputs. The dynamic regression model is employed to examine the hypothesis.

24. Summarized conclusion The advances in regional marketization enable the bridging of the gap between the science and industrial sectors. The well-defined technology market is helpful for pricing knowledge and encouraging innovation because of appropriate protection of intelligence. The improvement in the market mechanism also makes market competition much more intense. The market competition pressure forces firms to innovate more. Foreign firms agglomerating in industrial clusters may facilitate the cross-border technology linkage. With the perspective of learning regions, the industrial clustering improves the flow of knowledge which is diffused amongst the resident firms. A region with better learning capabilities is able to have higher innovative capabilities.