The Effect of Innovation Policy on China’s Competitiveness and the Reaction of Firms in Germany Funded by BMBF             

(among others with L. Brandt, P. Mohnen, E. Mueller, B. Peters, X. Zhang)

We investigate the effectiveness of China’s innovation policy in supporting innovation and competitiveness as well as the adaptation of firms in Germany to increasing import competition from China. The starting point is the observation that increasing research and development (R&D) expenditures and patent applications are accompanied by declining total factor productivity (TFP) growth, which suggests insufficient returns to innovation. Therefore, we investigate the causal influence of innovation on competitiveness in China. Particular attention is paid to whether China’s innovation policy succeeds in generating stronger productivity effects through mission-oriented innovation incentives than through market-oriented innovation. Furthermore, we examine the extent to which firms in Germany are adapting to increasing import competition from China – the largest importer in Germany since 2014. We distinguish between import competition on product and factor markets. It is of key importance for business and policy makers to understand whether product market competition with producers from China and the increasing supply of technologically advanced Chinese inputs in the factor market constitute an incentive or a barrier to innovation in German firms. We therefore investigate the causal effect of the Chinese import competition on innovation and TFP in German firms.