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Induced innovation and its impact on productivity growth in China: a latent variable approach

Author

Listed:
  • Ka Kei Gary Wong

    (University of Macau)

  • Min Qiang Zhao

    (Xiamen University)

Abstract

This paper proposes a latent variable approach to examine the induced innovation hypothesis originating from Hicks (The theory of wages, Macmillan, London, 1932). It allows a flexible decomposition of total factor productivity into Type I (exogenous) and Type II (induced) technical changes using a latent variable d as an argument in a variable cost function. By making extensive use of duality theory, we are able to estimate the Hicksian input demand functions, which are explicit in d but may lack a closed-form representation in terms of observable variables such as input prices and output level. The “unobservability” of d is solved by using a numerical inversion estimation method. We apply this methodology with an appropriate estimator to investigate the impact of induced innovation on China’s total factor productivity growth. Our findings indicate that the induced innovation hypothesis is strongly supported by the data and that induced innovation has a positive and profound effect on China’s productivity growth.

Suggested Citation

  • Ka Kei Gary Wong & Min Qiang Zhao, 2023. "Induced innovation and its impact on productivity growth in China: a latent variable approach," Empirical Economics, Springer, vol. 65(1), pages 371-399, July.
    • Handle: RePEc:spr:empeco:v:65:y:2023:i:1:d:10.1007_s00181-022-02333-2
    DOI: 10.1007/s00181-022-02333-2
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    More about this item

    Keywords

    Induced innovation; China; Total factor productivity; Numerical inversion method;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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