China’s Innovation Policy: An Evidence-based Perspective

Abstract:

"After joining the WTO, China has rapidly become the "factory of the world". But China's latest ambitions go far beyond that, as it aims to become the world's leading nation in science and technology by 2050. These ambitious goals have been accompanied by government policies, including targeted subsidies for research and development (R&D). However, the steady increase in the government budget for R&D policy has also been accompanied by an evident lack of coordination and transparency in the allocation and subsequent monitoring. In China’s case, this has led to the widespread misappropriation of R&D subsidies for non-research purposes. Such moral hazard behavior constitutes a decisive constraint for successful policy implementation and hence for transforming well-intentioned policy designs into desirable economic outcomes. By accessing and analyzing unique data, the presentation offers an evidence-based perspective on the effectiveness of China’s innovation policy. Results show that policy support has led to an increase in R&D spending and output growth, but they also point to remaining inefficiencies without which the policy would have been far more effective. By addressing misappropriation, policymakers could double policy effectiveness and move China closer to achieving its ambitions."