National economic and technological development zones (NETDZs), an important innovation policy in China, play a significant role in promoting innovation. However, there are few empirical studies on their impact on innovation, especially green innovation. This study uses highly disaggregated micro-level data, including patent data, industrial firm data, and customs data to examine the impact of NETDZs on green innovation. The results showed that (1) NETDZs significantly promote green innovation, as measured by both patent quantity and quality; (2) the binding environmental indicators in China’s five-year plan enhance the promotional effect of NETDZs on green innovation; and (3) learning by importing, via both foreign direct investment and importing capital goods, is an important mechanism in the nexus between NETDZs and green innovation.

NETDZs Are Important Engines Driving Green Innovation in China

China's National Economic and Technological Development Zones (NETDZs) are considered vital drivers of technological innovation in the country. In 2018, high-tech firms located in NETDZs accounted for approximately 12.77% of all high-tech firms in China, and patent intensity (inventions per 10,000 workers) in NETDZs was significantly higher at 5.26 compared to the national average (Cheng et al. 2020).

While innovation is generally acknowledged as the engine of economic growth, green innovation—namely, technological innovation related to environmental improvement, not only promotes economic growth; it also improves the environment, and thus resolves any conflicts or trade-offs between economic growth and environmental sustainability. Our empirical analysis indicates that NETDZ pilots successfully promote green innovation, as measured by both patent quantity and quality.

Learning by Importing: An Important Mechanism in the NETDZ-Green Innovation Nexus

Learning by importing is an important way for latecomers to catch-up with developed countries in terms of technological development. There are two common ways of learning by importing: through capital goods imports and foreign direct investment (FDI). In China, capital goods (machinery and transport equipment) imports grew from US$ 137 billion in 2002 to US$ 735 billion in 2017, while FDI grew from US$ 920 million in 1983 to over US$ 1.4 trillion in 2020. The rapid growth of capital goods imports and FDI occurred simultaneously with the establishment of NETDZs, which encourage learning both by importing capital goods and through FDI.

FDI and capital goods imports have been shown to be important ways of promoting technological learning, and thus innovation (Kim 1980). Many countries, including Japan (Samuels 1996) and South Korea (Kim 1997) accelerated their innovation capabilities to “catch-up” with other nations through technological learning. One stream of the literature shows that increases in capital goods imports can enhance the opportunity to obtain advanced technological knowledge (Acharya and Keller 2008), and thus promote innovation. Another stream of the literature stresses the importance of FDI in facilitating technology transfer and improving innovation, especially with respect to invention patents (Chen et al. 2022).

We find that capital goods imports and FDI strengthen the positive impact of NETDZ pilots on the number of green patents issued, indicating that NETDZ pilots promote green innovation through learning by importing.

Environmental Constraints in the Five-Year Plan Benefits Green Innovation

Since 2006, the Chinese central government has included binding environmental indicators in each five-year plan, and previous studies have investigated the impact of these constraints. Environmental protection has become a key factor in assessing local governments’ achievements, and thus affect whether local officials are promoted. The theory of promotion tournaments involving local officials (Li and Zhou 2005) states that the special institutional arrangements in China should act as an incentive for local officials to engage in green innovation activities.

We conduct group regressions by dividing the entire sample period into sub-periods before and after 2006. We find that the effects after 2006 are nearly three times larger than those before 2006. This indicates that the binding indicators related to the environment that are now included in China’s five-year plans have promoted green innovation.

The Specialty of State-owned Enterprises

One important feature of the Chinese economy is that firms with different ownership types operate under different constraints and different incentives, which can result in different innovation behaviors. Firm ownership types include state-owned enterprises (SOEs), non-SOEs (including collectively owned enterprises, legal-person enterprises, and individually owned enterprises), and foreign-owned enterprises (FOEs, including Hong Kong, Macao, Taiwan (HMT), and other foreign-owned enterprises).

Our empirical results show that establishing NETDZs promotes green innovation through capital goods imports in non-SOEs and FOEs, but not SOEs. There are two possible reasons for this finding: 1) SOEs bear heavy social burdens, which make their goals deviate from technological innovation and profit maximization, and 2) SOEs have more significant principal–agent problems because they are owned by governments, which cannot effectively supervise management, thus increasing the likelihood of encountering moral hazards. For example, managers of SOEs are more likely to pursue their own short-term interests instead of maximizing technological innovation and long-term earnings. These social burdens and principal–agent problems mean that SOEs lack the proper incentives to engage in innovation activities through importing capital goods.

Our results show that establishing NETDZs promotes green innovation in all types of firms, including SOEs, through FDI. A possible reason for this finding is that technological learning from capital goods imports requires a great deal of independent learning ability and willingness to learn, while technological learning from FDI is more likely to be achieved through either technology cooperation or technology transfer. This may be why China has been widely criticized for “stealing” foreign technology through forced technology transfers (Prud’homme and Zedtwitz 2019). While we have shown that it is possible for SOEs to improve their green innovation by attracting foreign investment, whether this technology transfer is forced or voluntary requires further investigation.

Policy Implications

Based on the empirical findings presented in this study we suggest the following policy recommendations for China: 1) Encourage and strengthen the role of NETDZs in attracting FDI and importing capital goods to promote green innovation, which will help achieve the country’s goal of carbon-neutrality. 2) Include environmental goals as binding indicators in the central government’s macro plans to guide firms’ behaviors related to environmental protection. 3) Increase openness to take advantage of learning by importing, which plays an important role in facilitating green innovation, despite increased global trade barriers and technology protections. 4) Reduce social burdens and alleviate principal–agent problems for SOEs through means such as privatization, to provide stronger incentives for SOEs to pursue technological learning from import activities. These recommendations can help China to promote green innovation and achieve its environmental goals while maintaining economic growth.

Authors’ note:

This column is mainly based on: Cheng, Wenyin, Qingchun Wang, Xin Ouyang, Yize Xie, Yuning Gao, and Anqi Yu. 2022. “Effect of Economic and Technological Development Zones on Green Innovation: Learning by Importing Perspective.“ Journal of Global Information Management 30(6):1–18. http://doi.org/10.4018/JGIM.315748

Reference

Acharya, Ram C., & Keller, Wolfgang. 2008. “Estimating the Productivity Selection and Technology Spillover Effects of Imports.“ NBER Working Paper No. w14079.

Chen, Yongmin, Haiwei Jiang, Yousha Liang, and Shiyuan Pan. 2022. “The Impact of Foreign Direct Investment on Innovation: Evidence from Patent Fillings and Citations in China.“ Journal of Comparative Economics 50(4): 917–45.

Cheng, Wenyin, Bo Meng, and Yuning Gao. 2020. “China’s Innovation Boom: Miracle or Mirage?” IDE Discussion Paper no. 777. http://doi.org/10.20561/00051687

Cheng, Wenyin, Qingchun Wang, Xin Ouyang, Yize Xie, Yuning Gao, and Anqi Yu. 2022. “Effect of Economic and Technological Development Zones on Green Innovation: Learning by Importing Perspective.“ Journal of Global Information Management 30(6):1–18. http://doi.org/10.4018/JGIM.315748

Kim, Linsu. 1980. “Stages of Development of Industrial Technology in a Developing Country: A Model.“ Research Policy 9(3): 254–77.

Kim, Linsu. 1997. “Imitation to Innovation: The Dynamics of Korea’s Technological Learning.” Boston, MA: Harvard Business School Press.

Li, Hongbin, and Li-An Zhou. 2005. “Political Turnover and Economic Performance: The Incentive Role of Personnel Control in China.” Journal of Public Economics 89(9–10): 1743–62.

Prud'homme, Dan, and Max von Zedtwitz. 2019. “Managing ‘Forced’ Technology Ttransfer in Emerging Markets: The Case of China. “ Journal of International Management 25(3), 100670.

Samuels, Richard J. 1996. “Rich Nation, Strong Army: National Security and the Technological Transformation of Japan.“ Ithaca, NY: Cornell University Press.

About the Author

Wenyin CHENG is a research fellow at Institute of Developing Economies, JETRO (IDE-JETRO). My research interest mainly focuses on innovation, productivity and global value chains. I also have some publications related to trade, environment, labor economics, etc. Most of my empirical research has been based on highly disaggregated micro-level big data employing different kinds of econometric models. I have also developed some theoretical models. I hold Ph.D. of Management from Tsinghua University, China and worked at Tsinghua University and Organisation for Economic Co-operation and Development (OECD) before joining IDE-JETRO.

Other Articles by This Author

Pan, Xia, Wenyin Cheng, and Yuning Gao. 2022. “Impact of Privatization of State-Owned Enterprises on Innovation in China: A Tale of Privatization Degree.” Technovation 118, 102587. https://doi.org/10.1016/j.technovation.2022.102587

Pan, Xia, Wenyin Cheng, Yuning Gao, Tomas Baležentis, and Zhiyang Shen. 2021. “Is Environmental Regulation Effective in Promoting the Quantity and Quality of Green Innovation?” Environmental Science and Pollution Research 28: 6232–41. https://doi.org/10.1007/s11356-020-10984-w

* The views expressed in the columns are those of the author(s) and do not represent the views of IDE or the institutions with which the authors are affiliated.
** Thumbnail image: The industry zone in Taizhou city, Zhejiang Province, China, photo by W. Cheng.