Human Capital Allocation, Technological Innovation and Sustainable Growth of the Chinese Economy

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Human Capital Allocation, Technological
Innovation and Sustainable Growth of the Chinese
Economy

• Professor Weiying Zhang
• Guanghua School of Management
• Peking University
• 24 April, 2006
• Stern School, NYU

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Facts

• Chinas economic growth has been astonishingly
  successful in the past 26 years
• Average annual growth rate is 9.4
• The total GDP in 2004 is tenfold of that in 1978
• Per capita GDP growth rate is 8.1
• Real per capita GDP of 2004 is more than
  sevenfold of 1978.

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Source 2005 China Statistical Yearbook
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Source 2005 China Statistical Yearbook
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Questions

• Two Questions
• What is the main driving force for the high
  growth?
• Could the high growth be sustained in future?
• I provide a simple framework to address the
  issues.

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Allocative Efficiency and Productive Efficiency

• Two sources of growth allocative efficiency and
  productive efficiency
• Allocative Efficiency production factors move
  from low productivity-low value sectors to high
  productivity-high value sectors price must be
  right
• Productive Efficiency Increase in productivity
  through technological innovation incentive for
  innovation must be right.

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Good 2
A
B
C
Good 1
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Shift in the Sources

• The high growth in the past 26 years has been
  mainly driven by improvement in allocative
  efficiency, particularly reallocation of human
  capital
• The potential of allocative efficiency is
  diminishing probably for another 10 years
• Sustainability of growth in future much depends
  on improvement in productive efficiency, that is,
  technological innovation.

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Allocation of Human Capital

• Allocation of human capital is more important
  than stock of human capital!
• Talents and entrepreneurship can be used in
  different sectors (Baumol, 1990 Murphy, Shleifer
  and Vishny, 1994)
• What do most talented people do? Particularly,
  government or business?
• Economic development is determined by ability of
  businesspeople.

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Types of Talents Allocation
high
entrepreneurs
bureaucrats
bureaucrats
middle
entrepreneurs
bureaucrats
workers
entrepreneurs
workers
low
workers
Type II Latin America
Type I Traditional China
Type II Developed countries
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Reallocation of Human Capital

• In the history, China had open government and
  closed businesses
• Businessmen were ranked lowest in society.
• Talented people went to government through
  imperial examinations
• Change from best students go to government to
  best students go to business

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Three waves

• 1980s entrepreneurial peasants began
  entrepreneurial activities TVEs development
• 1990s government officials and scholars went
  into business (xia hai), triggered by June 4th
  Event
• Around 2000, internet bubble attracted both
  overseas returned scholars and domestically best
  educated people to start-ups.
• From rent-seeking to value-creation

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Where Do PKU Undergraduates Go?
SourcePeking Universitys Career Service Office
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Education Levels of Chinese Managers
Sources(1) Chinese Entrepreneur Survey System
(2) Reform Institute of China
(1985 Survey)
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Other reallocation factors

• Labor mobility from peasants to workers
• Industrial sector restructuring
• Regional trade and division of labor
• International trade
• Foreign investments

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Variation of Capital Productivities across
provinces
Source Gong Liutang and Xie Danyang (2004)
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Variation of Labor Productivities across Provinces
Source Gong Liutang and Xie Danyang (2004)
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How Big Potential of allocative efficiency is

• Still, but diminishing
• Business is still not free entrepreneurs feel
  uncertain Immigrant movement is a signal
• Catch-up is easier (through imitation) further
  advancing is more difficult
• Labor cost China/USA labor productivity is 1/6
  labor wage is 1/42 so, labor cost is 1/7
• But the labor cost advantage is diminishing very
  fast high skilled labor markets are more
  globalized.

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Source 2005 China Statistical Yearbook
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Challenges

• Sources of growth must shift from allocative
  efficiency to productive efficiency
• This depends on technological innovation, RD
  investments
• Chinese enterprises not much technology
  accumulation, low absorbability, low RD
  investments and low incentives for innovation
• Chinese entrepreneurs are good at imitation, but
  bad at innovation.

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Source 2005 China Statistical Yearbook on
Science and Technology
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Source 2005 China Statistical Yearbook on
Science and Technology
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Percentages of Advertising and RD in Revenue
with Firm Sizes in Manufacturing (2001-2003)
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Percentage of Advertising and RD in Revenue
With Firm Ages in Manufacturing (2001-2003)
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  Advertising and RD Expenditure in
Pharmaceutical Industry (2003)
USA 10.5 (1997)
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Communication, Computers and Other Electronic
Equipments
Note 13 of RD to Revenue in US Computers
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Source 2004 China Statistical Yearbook.
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Percentage of Firms with
at least 1 patent in ZGC Science Park
year
Source PKU e-Business Center, 2005
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Consequences

• Since Chinese firms have no core technologies,
  entry barriers are very low, and price
  competition is very intensified!
• Thus, low market concentration ratios
• Low profit margin.

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Source 2005 China E/I Industry Statistical
Yearbook
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Past is not a good guide for future

• Human capital reallocation has driven the high
  economic growth in the past 26 years!
• China faces new challenges!
• Economic growth cannot be sustained without
  significant progress in technological innovation!

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Institutional Changes Needed

• Property rights protection and in particular IPP
  are fundamental for innovation
• It determines horizon of business people
• It direct directions of innovation (Petra Moser
  2005,AER)
• Industry integration is needed for innovation
• Deregulation and competition policy
• Education system

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Cont

• Anti-corruption
• Business norms
• For a successful transformation, China must
  continue to address institutional problems,
  particularly legal system rule of law.

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Thank you!