The impact of product innovation on firm-level markup and productivity: evidence from China

Xiaoyong Dai and Liwei Cheng

Applied Economics, 2018, vol. 50, issue 42, 4570-4581

Abstract: This article empirically evaluates the impact of product innovation on firms’ markup and productivity. Based on a large sample of Chinese manufacturing firms, we estimate firm-level markup using the wedge between output elasticities of intermediate input and its cost share in total revenue. Firm productivity is measured as revenue productivity and adjusted with the estimated markup. The results suggest that product innovation increases firm-level markup and revenue productivity. However, the effect of product innovation on the adjusted productivity is mostly negative or insignificant. The observed relationships also vary in response to market structures. Our results indicate that the positive impact of product innovation on revenue productivity is mainly driven by price-cost markup changes rather than physical productivity improvements. Our study suggests the widely observed positive relationship between product innovation and revenue productivity should be interpreted with caution.

Date: 2018
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DOI: 10.1080/00036846.2018.1458195

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