Productivity of Chinese Regions and the Location of Multinational Research and Development

This article examines the determinants and interregional spillovers of regional productivity and multinational enterprise (MNE) research and development (R&D) in China. The authors apply a two-equation recursive model to a panel data set of thirty provinces and equivalents from 1998 to 2005. The estimated MNE R&D location equation indicates that the main determinants of MNE R&D location are supply-side factors—the availability of scientists and engineers, the average salary of R&D personnel, regional infrastructure, and spillovers of MNE R&D in the neighboring regions, but not demand-side factors such as the size of regional market and the previous foreign direct investment (FDI). Moreover, MNE R&D has a strong tendency to locate in regions with an export-oriented economy. The productivity equation reveals a significant causal relationship between MNE R&D investment and regional productivity. The estimates further indicate that regional productivity is determined not only by factor inputs within own region but also by productivity in the neighboring regions. In conclusion, the authors briefly discuss the policy implications of the findings for increasing the productivity of different regions and using MNE R&D.