Abstract
This research, which investigates a set of fundamental relationships in the R&D literature, is based on an unusually rich set of panel data covering the population of China's large and medium-size manufacturing enterprises. Using a recursive three-equation system, we investigate the determinants of firm-level R&D intensity, the process of knowledge production, and the impact of innovation on firm performance. Several results stand out. Overall, the statistical relationships within the model are surprisingly robust, including the contributions of R&D expenditure to new product (NP) innovation, productivity, and profitability. The roles of firm size, market concentration, and profitability in driving R&D effort parallel to those found in the US literature. We find that new product (NP) innovation accounts for approximately 12% of the total returns to R&D. Also, returns to industrial R&D in China appear to be at least three to four times the returns to fixed production assets.