Chinese and Korean Firms Productivity Catch Up to Japanese Firms

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1 Chinese and Korean Firms Productivity Catch Up to Japanese Firms Philipp Boeing, Centre for European Economic Research Tomohiko Inui, Gakushuin University and RIETI Young-Gak KIM, Senshu University Hongyong Zhang, RIETI Extended Abstract Japanese manufacturers have been facing the fierce competition from Korean and Chinese Firms in the international export market in the 1990 s and 2000 s. For example, Japanese electrical machinery industry suffered a notable downturn in its international competitiveness. According to the UN Database, Japan accounted for 12.2% of the world's total export value in electrical machinery and equipment in 2000, but the share decreased to 4.4% in In contrast, South Korea and China increased their shares in export value in this industry from 4.7% each in 2000 to 5.8% and 24.3% respectively in We also calculated the revealed comparative advantage (RCA) of the three countries using the same UN database. Japan's RCA in the electrical machinery industry dropped from 1.6 in 2000 to 1.1 in On the other hand, the RCA of South Korea and China rose from 1.7 to 1.8 and from 1.2 to 1.9, respectively over the same period. These facts clearly indicate South Korean and Chinese electric machinery firms have increased their productivity substantially and expanded their sales in the international market. Many papers pointed out the increased productivity is a key determinant of firm entry to the export market and their expansion of the export amount. This paper examines the role of R&D investment on firm productivity improvement with taking into consideration of the catching-up process. Our study is partly motivated by the recent research on firm productivity convergence, such as Bartelsman et al. (2008) and Griffith, et al. (2009). Bartelsman et al. (2008) compared the European firms catch-up direction between the national frontier firms and the global frontier firms, and they find the national frontier firms play the more important role as a source of knowledge spillover to the domestic firms in Europe. On the other hand, Griffith et al. (2009) examined the British firms catch-up to both the national and regional productivity frontiers. Our paper is one of the first that examine the firms' catching up process among the East Asian neighboring countries, China, Korea and Japan, and also sheds the light on how the different stage of development affects the catching up process. We use the listed firm data from each country and industry specific PPP rates, and estimate the internationally comparable TFP level of each firm in Corresponding author. Faculty of International Social Sciences, Gakushuin University, Mejiro, Toshima-ku, Tokyo , Japan, Tel: Fax: address: tomohiko.inui@gakushuin.ac.jp 1

2 the country by applying the method developed in Fukao et al. (2011). First, we regress TFP growth on R&D intensity based on the knowledge production framework of Griliches (1979), without controlling the catching-up process (see Table 1). Japanese R&D does contribute to the productivity growth in period, although the rate of return on R&D is very small. The rate of return on R&D in Korea is very high in early 90 s, but the rate declined substantially in the 2000s. On the other hand, Chinese firms R&D does not contribute to their productivity growths in the 2000s. Secondly, we estimate the effects of R&D on TFP growth with taking into account of distance to the regional technological frontier of firms (see Table 2). Our estimation results show that the catching-up to the regional frontier firms is the most important driver of the productivity growth in China, Korea, and Japan. R&D investment plays an important role for innovation in Japan in the the1990s. The R&D expenditures play almost no role both in Korea and China in the 2000s. Chinese and Korea R&D investments play important roles for the technology transfer. Our results indicate that once Chinese and Korean firms catch up to the global frontier technology, they may become difficult to further improve their technological level. Our paper contributes to the literature in two ways. First, compiling a unique panel dataset that covers listed manufacturing firms in China, Japan and Korea, we estimate internationally comparable productivity levels and conduct a unified comparative analysis on both productivity growth rate and the rate of R&D return in these three East Asian countries. Second, we argue that the interaction of firm-level R&D activities and firm-specific distance from the global frontiers are crucial to determine the catch-up process. The effects of R&D on productivity growth and productivity catchup depend on firm-specific distance from the technological frontiers. Keywords: Catch Up, R&D, TFP, International Comparison JEL code: L1; D24; O3; O57 References Bartelsman, E., J. Haskel, and R. Martin (2008). Distance to which frontier? Evidence on productivity convergence from international firm-level data, CEPR Discussion Paper 7032, Centre for Economic Policy Research, London. Fukao, K., Inui, T., Ito, K., Kim, Y. G., & Yuan, T. (2011). An international comparison of the TFP levels and the productivity convergence of Japanese, Korean, Taiwanese and Chinese listed firms. Journal of Chinese Economic and Business Studies, 9(2), Griffith, R., Redding, S., & Simpson, H. (2009). Technological Catch Up and Geographic Proximity. Journal of Regional Science, 49(4), Griliches, Z. (1979) Issues in assessing the contribution of R&D to productivity growth. The Bell 2

3 Journal of Economics, 10: Table 1. R&D Effects on TFP growth by Country China lntfp (1) (2) (3) L1_RNDint (0.056) (0.224) (0.058) L1_lnTFP 0.067*** 0.054*** 0.070*** (0.008) (0.017) (0.009) L1_SOE (0.003) (0.008) (0.004) Observation 2, ,073 F value R Squared Korea L1_RNDint 0.082*** 0.260*** *** 0.052** (0.016) (0.075) (0.048) (0.025) (0.026) L1_lnTFP 0.300*** 0.287*** 0.316*** 0.307*** 0.294*** (0.006) (0.014) (0.017) (0.011) (0.010) Observation 12,495 2,309 1,588 4,096 4,502 F value R Squared Japan L1_RNDint 0.040*** 0.079*** 0.104*** 0.057*** (0.009) (0.022) (0.021) (0.017) (0.014) L1_lnTFP 0.119*** 0.113*** 0.121*** 0.118*** 0.124*** (0.003) (0.007) (0.007) (0.006) (0.006) Observation 24,887 4,885 5,782 7,332 6,888 F value R Squared Table 2. R&D and Catching Up Effects on TFP Growth by Country 3

4 China lntfp (1) (2) (3) L1_RNDint ** (0.070) (0.284) (0.072) L1_RNDint 0.268** 1.045* 0.245* (2nd) (0.133) (0.577) (0.138) L1_RNDint (3rd) (0.171) (0.646) (0.179) L1_RNDint 0.579*** ** 4 (Bottom) (0.224) (1.021) (0.231) Adist (2nd) (0.005) (0.010) (0.005) Adist (3rd) 0.012*** ** (0.004) (0.010) (0.005) Adist (Bottom) 0.023*** *** (0.005) (0.011) (0.005) L1_SOE (0.003) (0.008) (0.004) Observation 2, ,048 F value R Squared Korea L1_RNDint 0.109*** 0.430*** *** (0.035) (0.116) (0.080) (0.064) (0.058) L1_RNDint 0.161*** 0.450** *** (2nd) (0.057) (0.223) (0.163) (0.098) (0.093) L1_RNDint 0.154*** 0.502*** *** (3rd) (0.050) (0.180) (0.201) (0.086) (0.083) L1_RNDint 0.426*** ** 0.417*** 0.476*** 4 (Bottom) (0.041) (0.210) (0.105) (0.071) (0.068) Adist (2nd) 0.013*** 0.020*** 0.010* 0.010** 0.014*** (0.002) (0.004) (0.005) (0.004) (0.005) Adist (3rd) 0.026*** 0.024*** 0.025*** 0.029*** 0.029*** (0.002) (0.004) (0.005) (0.004) (0.004) Adist (Bottom) 0.058*** 0.055*** 0.055*** 0.062*** 0.058*** (0.002) (0.004) (0.005) (0.004) (0.005) Observation 12,287 2,284 1,573 4,011 4,419 F value R Squared

5 Japan L1_RNDint 0.027* 0.076** 0.086*** (0.015) (0.036) (0.032) (0.029) (0.027) L1_RNDint (2nd) (0.024) (0.053) (0.052) (0.044) (0.046) L1_RNDint (3rd) (0.025) (0.060) (0.057) (0.045) (0.046) L1_RNDint 0.045** ** (Bottom) (0.020) (0.050) (0.047) (0.038) (0.034) Adist (2nd) 0.006*** 0.006*** *** 0.009*** Adist (3rd) 0.011*** 0.010*** 0.009*** 0.013*** 0.014*** Adist (Bottom) 0.024*** 0.019*** 0.018*** 0.029*** 0.029*** Observation 24,469 4,840 5,701 7,196 6,732 F value R Squared