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

In three work packages, we examine 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 for work package 1 (WP 1) is the observation that increasing research and development (R&D) expenditures and patent applications that are paralleled by decreasing growth in total factor productivity (TFP), which suggests insufficient returns to innovation. Therefore, WP 1 examines the causal influence of innovation on competitiveness (TFP) in China. Particular attention is paid to the question of whether China’s innovation policy succeeds in generating stronger productivity effects through mission-oriented innovation incentives compared to market-oriented innovations. WP 2 and WP 3 examine the extent to which firms in Germany are adapting to increasing import competition from China – the largest importer in Germany since 2014. We differentiate between import competition on product and factor markets. It is of central importance for business and politics to understand whether the product market competition with producers from China and the increasing supply of technologically advanced Chinese intermediate inputs in the factor market represent an incentive or a barrier to innovation in German firms. Hence, WP 2 examines the causal effect of the Chinese import competition on innovation and TFP in German firms. WP 3 supplements this analysis by examining changes in German firm’s innovation strategies, R&D structures, investments and the objectives pursued through such activities on the basis of detailed case studies in selected technological fields and markets. The insights provided through our empirical analysis are conducive to an evidence-based design of German innovation policy in response to China's increased competitiveness.