Essays on Innovation and Productivity
Open Access
- Author:
- Chen, Zhiyuan
- Graduate Program:
- Economics
- Degree:
- Doctor of Philosophy
- Document Type:
- Dissertation
- Date of Defense:
- June 04, 2020
- Committee Members:
- Jonathan Eaton, Dissertation Advisor/Co-Advisor
Mark John Roberts, Committee Chair/Co-Chair
Jingting Fan, Committee Member
James R. Tybout, Committee Member
Chloe Jeanne Tergiman, Outside Member
Marc Albert Henry, Program Head/Chair
Jonathan Eaton, Committee Chair/Co-Chair - Keywords:
- Financial constraints
R&D investment
Total factor productivity (TFP)
Patents
Costs-benefits analysis
Patent surge
China
Patent subsidy
FDI - Abstract:
- My studies focus on the determinants and aggregate implications of innovation and productivity. This dissertation includes three chapters. Chapter 1 in on the role of R&D investment in determining the relationship between finance and total factor productivity (TFP). Chapter 2 is on the quantification of the costs and benefits of R&D and patent. The last Chapter provides an analysis of the driving forces behind the patent growth in China. Firms in developing countries are less innovative than that are in developed economies. A large body of literature has documented that the lack of financial support has hindered firms from participating in R&D investment. How much does the R\&D channel account for the productivity loss caused by financial constraints? How does R&D investment affect the efficacy of self-financing in the reduction of TFP losses? In Chapter 1, I attempt to shed light on each of these questions by using a quantitative model of R&D investment with financial frictions. In the model, R&D investment, which affects productivity evolution endogenously, is subject to financial constraints. I parameterize the model with production, innovation, and balance sheet data from manufacturing firms in China, a country with relatively less developed financial markets. Through the lens of the model, I first quantify static and dynamic TFP losses. I then analyze the transition dynamics and the steady state of the model. Finally, to gauge the importance of R&D investment for understanding the relationship between finance and TFP, I compare the results of the estimated model with a model's special case in which the productivity process is exogenous. The estimated model implies sizeable static TFP losses caused by capital misallocation and dynamic TFP losses from distorting R&D investment. The accumulation of internal funds reduces the static TFP loss gradually. In contrast, because R&D has a persistent effect on productivity, the dynamic TFP loss rises initially and declines later. Compared to a model with exogenous productivity, innovation investment makes firms less able to use self-financing to reduce TFP losses and prolongs the transition. Endogenous productivity growth amplifies the gains in TFP and output from financial reform and leads to a longer-lasting consequence from a credit crunch. Improving the pledge-ability of intangible assets in China to be the US level reduces the static TFP loss only 0.4%, but the dynamic TFP loss by 7.1%. I explore several policy implications of the quantitative model. First, I consider a financial reform that relaxes the credit constraints permanently. I find that the boosting effects of financial reform on aggregate TFP and output are amplified when considering the endogenous response of R\&D investment. Second, I study a credit crunch by tightening the financial constraints for one period. I show that the detrimental impact of a credit crunch on aggregate TFP and output tends to be longer-lasting when I account for the endogenous growth of productivity. Different firms undertake different levels of R&D investment. Quantifying the costs and benefits of innovation activities is essential to the understanding of firms' incentives to innovate. Innovation is a process of producing new knowledge of new products or new processes. In the process, R&D in the input while patenting is part of the output. What are the benefits of R&D from patenting and non-patenting activities? In Chapter 2, I embed patents into the productivity evolution of a standard dynamic model of endogenous productivity change. I treat R&D as the fundamental source of endogenous productivity growth, but the marginal effect of R&D investment is affected by patenting activities. I propose a method to decompose the returns to R&D into patenting and non-patenting outcomes. The methodology also provides an evaluation of the patent value. I apply the model to a sample of Chinese high-tech manufacturing firms. The estimated model shows: first, on average R&D investment causes around 0.45% increase (or around 0.24 million USD) in the firm value. Second, a decomposition of the return to R&D shows that non-patenting innovation accounts for a majority (around 77%) of the total return to R&D. Third, the average expected value of an invention (a utility) patent is around 0.39 (0.34) million USD when measured by the increase in firm value. Lastly, the start-up costs of R&D is over ten times larger than maintenance costs. This reflects that starting a new innovation project requires a larger amount of investment than maintaining an ongoing research project. The distribution of R&D costs differs across industries. I also perform a series of counterfactual exercises to evaluate the effectiveness of different types of R&D subsidy policies that reduce the costs of R&D investment. Some interesting results are found. First, a lump-sum subsidy is universally more effective than a marginal subsidy either in increasing the firm value or promoting innovation participation. Second, for both types of subsidy programs, reductions in the maintenance costs cause a greater increase in the firm value. But subsidizing the start-up (maintenance) costs promotes innovation participation more under lump-sum (proportional) subsidy. Third, a lump-sum subsidy is more efficient than a proportional subsidy. In the experiment of a 20% decrease in maintenance costs for R&D, the average efficiency of lump-sum subsidy is around 12 times greater than the marginal subsidy in increasing firm value and is about twice greater in promoting the firm's innovation participation. The difference is more striking when I consider the subsidy for start-up costs of R&D. In the past three decades, China has experienced an explosive increase in both patent applications and patent granting. Breaking the patent counts into invention patents, utility models, and designs, this extraordinary growth prevails. If different types of patents represent distinct forms of innovation, patent heterogeneity should be important for understanding the driving forces behind China's patent surge as well as its policy implications. In Chapter 3, we study China's patent surge and its driving forces using a novel and comprehensive merged dataset on patent applications filed by Chinese firms. We find that R&D investment, FDI (Foreign Direct Investment), and patent subsidy have different effects on different types of patents. First, R&D investment has a positive and significant impact on patenting activities for all types of patents under different model specifications. Second, the stimulating effect of foreign direct investment on patent applications is only robust for utility model patents and design patents. Third, the patent subsidy only has a positive impact on design patents. The results imply that FDI and patent subsidy may disproportionately spur low-quality patents.