Quality Innovation, Cost Innovation, Exporting, and Firm Productivity Evolution : Evidence from the Chinese Electronic Industry

Innovation is a key driver of firm productivity, especially in the electronics industry. This paper looks into the nature of innovation by categorizing it into quality-improving and costreducing types and estimating a dynamic structural model incorporating firm export, quality innovation, and cost innovation decisions. Using plant-level data from the Chinese electronics industry, quality innovation, cost innovation, and export are found to increase next-period firm productivity by 3.51%, 1.97%, and 1.05%, respectively. Interestingly, cost innovation emerges as a stronger complement to export than quality innovation. While quality innovation increases next-period domestic and foreign revenues by 7.26% and 3.51%, cost innovation increases these revenues by 4.13% and 4.10%. Counterfactual analyses suggest that, surprisingly, policies rewardingnewexportersorinnovatorsdeterentryanddiscourageincumbents. Amongpolicies supporting incumbent firms, subsidies for cost innovation generate larger profit gains and higher returns per unit of program cost than subsidies on export or quality innovation