Technological Innovation, Adverse Selection, and the Market Size Trap : Evidence from China's Automobile Industry

This study investigates the influencing mechanism of market size on firms’ technological innovation using a dynamic model with firm heterogeneity and industrial policy distortion. Using micro-data on Chinese automobile enterprises, we find that the market size affects firms’ technological innovation decisions, as the market size increases, the likelihood that a firm will perform R&D decreases, R&D expenditure increases, leading to a lower ratio of new products. This study shows that in emerging countries with technological imitation advantages, the adverse selection effect dominates the scale effect, thus forming the market size trap for enterprises’ technological innovation activities