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The impact of product innovation on firm-level markup and productivity: evidence from China

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  • Xiaoyong Dai
  • Liwei Cheng

Abstract

This article empirically evaluates the impact of product innovation on firms’ markup and productivity. Based on a large sample of Chinese manufacturing firms, we estimate firm-level markup using the wedge between output elasticities of intermediate input and its cost share in total revenue. Firm productivity is measured as revenue productivity and adjusted with the estimated markup. The results suggest that product innovation increases firm-level markup and revenue productivity. However, the effect of product innovation on the adjusted productivity is mostly negative or insignificant. The observed relationships also vary in response to market structures. Our results indicate that the positive impact of product innovation on revenue productivity is mainly driven by price-cost markup changes rather than physical productivity improvements. Our study suggests the widely observed positive relationship between product innovation and revenue productivity should be interpreted with caution.

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  • Xiaoyong Dai & Liwei Cheng, 2018. "The impact of product innovation on firm-level markup and productivity: evidence from China," Applied Economics, Taylor & Francis Journals, vol. 50(42), pages 4570-4581, September.
    • Handle: RePEc:taf:applec:v:50:y:2018:i:42:p:4570-4581
    DOI: 10.1080/00036846.2018.1458195
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    2. Chunhsin Chou & Joeming Lee & Yingmaw Teng & Hsiuling Lee, 2022. "The relationships between productivity, operational risk, and firm performance," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 68(3), pages 97-106.
    3. Halima Jibril & Stephen Roper, 2022. "Of chickens and eggs: Exporting, innovation novelty and productivity," Working Papers 027, The Productivity Institute.
    4. Subhadip Mukherjee & Soumyatanu Mukherjee & Tapas Mishra & Udo Broll, 2019. "Export investment under uncertainty: a mean-variance decision analysis for Indian manufacturing exporters," Discussion Papers 2019-18, University of Nottingham, GEP.
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    6. Mukherjee, Subhadip & Chanda, Rupa, 2021. "Tariff liberalization and firm-level markups in Indian manufacturing," Economic Modelling, Elsevier, vol. 103(C).
    7. Wojciech Przychodzen & Fernando Gómez-Bezares, 2021. "CEO–Employee Pay Gap, Productivity and Value Creation," JRFM, MDPI, vol. 14(5), pages 1-17, April.
    8. Yang, Chih-Hai, 2023. "Competition in the Chinese market: Foreign firms and markups," Journal of the Japanese and International Economies, Elsevier, vol. 67(C).
    9. Dai, Xiaoyong & Sun, Zao, 2021. "Does firm innovation improve aggregate industry productivity? Evidence from Chinese manufacturing firms," Structural Change and Economic Dynamics, Elsevier, vol. 56(C), pages 1-9.
    10. Subhadip Mukherjee & Soumyatanu Mukherjee & Tapas Mishra & Udo Broll & Mamata Parhi, 2021. "Spot exchange rate volatility, uncertain policies and export investment decision of firms: a mean-variance decision approach," The European Journal of Finance, Taylor & Francis Journals, vol. 27(8), pages 752-773, May.

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