Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/216329 
Year of Publication: 
2020
Series/Report no.: 
IZA Discussion Papers No. 13017
Publisher: 
Institute of Labor Economics (IZA), Bonn
Abstract: 
We propose a new methodology to estimate empirically the input price-induced technical change and total factor productivity (TFP) growth in China. Our primary goal is to test Hicks' induced innovation hypothesis by examining whether technical change in China has been induced by sharp increase in input prices that have accompanied its rapid economic growth. Utilizing the idea of a firm's two-stage optimization problem, we develop a new parametric form of the variable profit function wherein the derived input demand and output supply functions can be easily constrained to be regular, and the functional structure is parsimonious in the number of parameters. Applying this methodology to Chinese time series data for 1986–2015, we find that not only is wage-induced innovation significant and quantitatively important, but also that it substantially buffers a long-term decline in TFP growth that would otherwise be quite substantial. We conclude that China's economic growth is predominantly driven by wage-induced innovation along with massive injection of heavily subsidized physical inputs in public works and huge investment in industrial sectors.
Subjects: 
induced innovation
total factor productivity
variable profit functions
China
JEL: 
D22
D24
O30
O53
Document Type: 
Working Paper

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