Discussion Paper

No. 2018-23 | March 06, 2018
Public education expenditure, institution development, and regional innovations: an empirical evidence from China


This paper investigates the relationship between government education expenditure and regional innovation, a key engine of China’s long-term economic growth as the nation undergoes massive economic restructuring and deep transformations. In an attempt to inform a whole-of-government approach in promoting indigenous knowledge generation, the authors examined the effect of two additional institutional factors, financial market development and Intellectual Property protection, as well as their interaction with education expenditure on regional innovation levels. By employing a sample of provincial panel data from 1998 to 2014, the authors find a significant positive correlation between education expenditure and regional innovation levels, an effect most pronounced in the Western provinces of China. Their analysis also revealed that financial market development augments the pro-innovation effect of education spending whereas a stronger IP protection regime could potentially mitigate such effect. The findings indicate that government investments in education as well as the creation of a more developed financial landscape will be effective ways to enhance regional innovation levels. However, attention should be paid to the nuances of the current IP protection system as well as the conduct of market players to pre-empt exploitations and enable greater incentives for sustained innovations.

JEL Classification:

I21, I28, O35


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Cite As

Chenhui Li, Xubei Lian, and Zhi Zhang (2018). Public education expenditure, institution development, and regional innovations: an empirical evidence from China. Economics Discussion Papers, No 2018-23, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2018-23

Comments and Questions

Anonymous - Referee Report 1
April 10, 2018 - 15:22

Thank you for the opportunity to review the paper "Public Education Expenditure, Institution Development, and Regional Innovation: An empirical evidence from China".
One major issue of the paper is it could not identify the causal effects of education and institution development on innovation. The panel framework with province fixed effects ...[more]

... is not sufficient to claim causality, because of potential time-varying provincial changes that could affect both education, institutions and regional innovations. These time-varying provincial changes are not captured by the province fixed effects. I take one example: a change in the top provincial party boss (the general secretary of the communist party) that could fundamentally change the whole province in many aspects, including education, institutions and innovation. The positive correlation between education and innovation that the author finds could reflect instead that (systemic) change. Nevertheless, I give credit to the authors because they acknowledge the point and are careful in their language.
I strongly encourage the authors to think deeper on the exogenous changes of education and institutions. This would greatly improve the paper, although this is also a major challenge.

Anonymous - Comment
April 17, 2018 - 10:18

This paper analysis the relation between education investment and regional innovation, measured by patent applications, in Chinese regions using a fixed effect panel data model.

The paper fails in providing casual evidence for this relation. Investment in education should be instrumented by identifying exogenous factors highly correlated with this ...[more]

... variable but not with the dependent variable.

Another concern is the use of patent applications to identify innovative active. As shown by the existing literature the use of patents is not always appropriate to identify innovation, and some robustness checks should be performed using other measures of innovative activity at the regional level.

Anonymous - Referee Report 2
May 04, 2018 - 10:45

see attached file