The dynamics of China¡¯s expenditure on R&D

R&D investment is enterprises¡¯ strategy based on the market demand on innovative products and its production capacity for them. Enlarging market demand would spur the enterprises¡¯ R&D input and the enhancement of technology state in production ability could have a complex effect on less developed countries¡¯ R&D expenditure. With the measurement of China¡¯s technology state compared to the United States and Japan, this paper explores with the state space model the dynamic effects of determinants on China¡¯s R&D expenditure with the data during 1987¨C2006. The result illustrates that the growing national income, a proxy of domestic market demand, impedes the further R&D investment in China due to the enormous demand for necessities dominated by lower income class, and the income inequality is the major incentive for R&D investment via the higher pricing on the wealthy group, and that the improvement of technology state reduces the innovation risk and plays an important role in stimulating R&D expenditureClassification-JEL: F2, H3, L6, O3