Since at least the beginning of the 1990s, economists have noted that innovation is indispensable to competitive advantage. But what about for manufacturing? Conventional wisdom has long been hostile to altering proven production methods.

But this is changing. Take the example of the People’s Republic of China.

Twenty-two years after the government’s 1978 economic reforms, China’s global manufacturing output was one-quarter that of the United States. Eleven years later, China had eclipsed the United States to become the world’s greatest producer.

Explanations for this surge highlight abundant labor, state subsidies, and growing local demand. Yet those could be found elsewhere, not just in China. The explanation must go deeper.

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Read the working paper

https://www.adb.org/publications/innovation-and-firm-performance-prc-structural-approach-spillovers

About the author

Anthony Howell is an assistant professor at the School of Economics of Peking University, Beijing, People’s Republic of China.

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