Determinants of Intangible Investment and Its Impacts on Firms' Productivity: Evidence from Chinese Private Manufacturing Firms

• Author: Yixiao Zhou,Ligang Song,Shenglang Yang
• Published date: 01 November 2018
• Date: 01 November 2018
• DOI: http://doi.org/10.1111/cwe.12259

©2018 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 1–26, Vol. 26, No. 6, 2018

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*Shenglang Yang (corresponding author), PhD Candidate, Crawford School of Public Policy, Australian

National University, Australia. Email: shenglang.yang@gmail.com; Yixiao Zhou, Lecturer, School of

Economics and Finance, Curtin University, Australia. Email: yixiao.zhou@curtin.edu.au; Ligang Song,

Professor, Crawford School of Public Policy, Australian National University, Australia. Email: ligang.

song@anu.edu.au.

Determinants of Intangible Investment and Its

Impacts on Firms’ Productivity: Evidence from

Chinese Private Manufacturing Firms

Shenglang Yang, Yixiao Zhou, Ligang Song*

Abstract

Using data from the 2012 China Enterprise Survey conducted by the World Bank, this

study examines the determinants of intangible investment by private manufacturing

rms and its impacts on rms’ productivity in China, thus shedding light on the recent

development of intangibles in one of the largest emerging economies in the world.

Higher human capital, larger firm size and better institutional quality are found to

increase the propensity and the amount of intangible investment, yet fiercer market

competition generally decreases both the propensity and the amount invested in

intangibles. We provide evidence that the disaggregated components of intangibles

are positively correlated with rm productivity and there is complementarity between

software and organization investment. Implications for policies to enhance investment in

intangibles are identied from the empirical results.

Key words: Chinese manufacturing rms, rm-level data, rm productivity, intangible

investment

JEL codes: C12, L22, O31

I. Introduction

Intangible capital consists of the stock of immaterial resources that enter the production

process and are important for the creation or improvement of products, as well as the

production process (Arrighetti et al., 2014). Examples of intangible capital include

research and development (R&D) investment, advertising, organization capital, staff

training, technology licenses, patents, and copyright (Corrado et al., 2013). Existing

literature has identied that intangible capital is playing a growing role in determining

Shenglang Yang et al. / 1–26, Vol. 26, No. 6, 2018

©2018 Institute of World Economics and Politics, Chinese Academy of Social Sciences

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rm productivity and thus the performance of local economies (Marrocu et al., 2012).

These mechanisms are particularly at play in developed economies where competition

is mainly based on ideas and innovation and, hence, firms are incentivized to invest

resources in developing intangibles. Corrado et al. (2009) estimate that the total value of

intangible capital in the US by the early 2000s was approximately US$3.6tn, suggesting

that intangible investment accounted for over 10–20 percent of US output growth

during that period. Similar phenomena are found in other countries including Japan,

Korea, a number of Organisation for Economic Co-operation and Development (OECD)

economies and China (Fukao et al., 2009; Marrano et al., 2009; van Ark et al., 2009;

Awano et al., 2010; Corrado and Hulten, 2010; Borgo et al., 2013; Corrado et al., 2013;

Haskel and Wallis, 2013; Miyagawa and Hisa, 2013; Chun and Nadiri, 2016; Li and Wu,

2017). Therefore, it is not surprising that recent literature has devoted increasing efforts

to define and measure intangible capital and study its effects on productivity growth

(Bontempi and Mairesse, 2008; Marrocu et al., 2012).

The mechanisms that drive firms to invest in intangibles have also received

increasing attention from researchers and policymakers (Hughes et al., 2006; OECD,

2010, 2011; Ebner and Bocek, 2015). Arrighetti et al. (2014) used data of Italian rms

to examine the determinants of rms’ investment in intangibles and revealed that larger

rms with higher human capital and more organizational complexity are more likely to

invest in intangibles. However, studies on why rms invest in intangibles in emerging

economies are scarce. Compared to developed economies, emerging economies are

often regarded as operating at the lower end of the global value chain, and thus require

a relatively small intangible capital stock for production activities. Intangible capital

often plays an important role in rms’ protability and competitiveness (Marrocu et al.,

2012). In order to climb up the global value chain, rms in developing economies need

to increase their intangible capital stock, which helps to boost product competitiveness

as well as firm productivity. Therefore, understanding the drivers underlying firms’

investment in intangibles in an emerging economy provides useful information to

policymakers who hope to spur rm investment in intangibles and enhance technological

and industrial upgrading of the economy.

Another motivation that prompts us to examine intangible investment in an

emerging economy is that the market environment of emerging economies is often

different from that of developed economies. Emerging economies tend to have lower

human capital and underdeveloped institutions. Moreover, because of the lack of core

technology and patents, rms in such economies tend to face intense competition on a

cost-cutting basis. It is therefore important that we examine the determinants of rms’

intangible investment in an emerging economy and reveal how the mechanisms may