Page 25 - The South China Business Journal
P. 25
Does “Decoupling” Affect Firm
Performance and Innovation in
China and the U.S.?
By the Stanford Center on China’s Economy and Institutions (SCCEI)
Is the divergence of tech ecosystems known as decoupling of 7.4% is associated with a 13.1%
“decoupling” good for domestic firm performance increase in China’s firm patenting activity one year
in the U.S. and China? Do the consequences of later, followed by a 2.1% drop in firm productivity
technological decoupling differ for innovation and and 5.2% decrease in firm valuation after two to
firm performance between the two countries? three years.
It is possible that decoupling can hurt firm • U.S. firms remain comparatively unscathed. In
performance by reducing knowledge spillover and comparison, the effects of technology decoupling
limiting access to foreign state-of-the-art technology. on U.S. firms were less pronounced. There was no
But it is also possible that decoupling can boost firm detectable relation between increased decoupling
performance by allowing firms to create on their and innovation output or innovation quality. Further,
own while they are sheltered from competition. U.S. firms did not appear to suffer any productivity
Researchers employed a unique analysis of firm losses. U.S. firms did experience a statistically
characteristics and patent activity to determine significant drop in firm valuation, though this drop in
if decoupling has helped or hurt the innovative valuation was only half as large as that incurred by
capacity, productivity, and valuation of firms in the China’s firms after decoupling.
U.S. and China.
• One-sided implications of decoupling for
• The data. The researchers first established a innovation and firm performance. While U.S.-
measure of technology decoupling based on patent China technology decoupling was associated with
databases in the U.S. and China that included all higher rates of innovation for China’s firms a year
publicly-listed firms that filed at least one patent later, its firm productivity and valuation suffered
between 2007 and 2019. If firms in either the U.S. or over two to three years, suggesting that indigenous
China increasingly cited domestic patents relative to innovation incurs costs associated with “reinventing
foreign ones, they were understood to be pursuing the wheel.” In contrast, the consequences of
their own technological trajectory, and therefore decoupling for U.S. firms were less obvious. This
increasingly “decoupled” from the technology may be because U.S. firms are primarily at the world
ecosystem of the other country. innovation frontier, so losing related technology
Researchers then sought to determine the from China inflicts little damage on their current
relationship between U.S.-China technology productivity. Nonetheless, a dip in firm valuation
decoupling and four measures of firm performance: suggests that stock markets believe decoupling
innovation output, innovation quality, total factor does not benefit U.S. firms in the long run: perhaps
productivity (TFP), and firm valuation. Innovation because decoupling implies U.S. firms losing a large
output was measured by the number of patent product market in China in addition to the losses
applications a firm filed and received in one year. due to reduced technology and talent exchanges.
Innovation quality measured the relative citation
strength of the patents, defined as the number of The researchers also noted that for China,
citations a firm’s patents received compared to other decoupling with the U.S. may be a proxy, perhaps to
patents in comparable years and technology classes. a lesser extent, for decoupling with the rest of the
developed West. In contrast, bilateral decoupling
• Decoupling for China’s firms: short-term likely does not mean the U.S. would decouple with
benefits, long-term costs. Sectors marked by other tech-important nations. Such an asymmetry
increasing U.S.-China technology decoupling may contribute to the more one-sided effect of
were associated with significantly higher rates of decoupling on firm productivity and valuation in
indigenous innovation by China, as measured by China compared to the U.S.
domestic patenting outputs, in the same field one
year later. But, this effect mostly disappeared after
two years. The higher rates of domestic innovation
were not associated with any decline in innovation
quality. However, over a horizon of two to three
years, heightened decoupling was also associated
with lower firm productivity and valuation.
More specifically, researchers projected that a
hypothetical increase in U.S.- China technology
SOUTH CHINA BUSINESS JOURNAL 22
Performance and Innovation in
China and the U.S.?
By the Stanford Center on China’s Economy and Institutions (SCCEI)
Is the divergence of tech ecosystems known as decoupling of 7.4% is associated with a 13.1%
“decoupling” good for domestic firm performance increase in China’s firm patenting activity one year
in the U.S. and China? Do the consequences of later, followed by a 2.1% drop in firm productivity
technological decoupling differ for innovation and and 5.2% decrease in firm valuation after two to
firm performance between the two countries? three years.
It is possible that decoupling can hurt firm • U.S. firms remain comparatively unscathed. In
performance by reducing knowledge spillover and comparison, the effects of technology decoupling
limiting access to foreign state-of-the-art technology. on U.S. firms were less pronounced. There was no
But it is also possible that decoupling can boost firm detectable relation between increased decoupling
performance by allowing firms to create on their and innovation output or innovation quality. Further,
own while they are sheltered from competition. U.S. firms did not appear to suffer any productivity
Researchers employed a unique analysis of firm losses. U.S. firms did experience a statistically
characteristics and patent activity to determine significant drop in firm valuation, though this drop in
if decoupling has helped or hurt the innovative valuation was only half as large as that incurred by
capacity, productivity, and valuation of firms in the China’s firms after decoupling.
U.S. and China.
• One-sided implications of decoupling for
• The data. The researchers first established a innovation and firm performance. While U.S.-
measure of technology decoupling based on patent China technology decoupling was associated with
databases in the U.S. and China that included all higher rates of innovation for China’s firms a year
publicly-listed firms that filed at least one patent later, its firm productivity and valuation suffered
between 2007 and 2019. If firms in either the U.S. or over two to three years, suggesting that indigenous
China increasingly cited domestic patents relative to innovation incurs costs associated with “reinventing
foreign ones, they were understood to be pursuing the wheel.” In contrast, the consequences of
their own technological trajectory, and therefore decoupling for U.S. firms were less obvious. This
increasingly “decoupled” from the technology may be because U.S. firms are primarily at the world
ecosystem of the other country. innovation frontier, so losing related technology
Researchers then sought to determine the from China inflicts little damage on their current
relationship between U.S.-China technology productivity. Nonetheless, a dip in firm valuation
decoupling and four measures of firm performance: suggests that stock markets believe decoupling
innovation output, innovation quality, total factor does not benefit U.S. firms in the long run: perhaps
productivity (TFP), and firm valuation. Innovation because decoupling implies U.S. firms losing a large
output was measured by the number of patent product market in China in addition to the losses
applications a firm filed and received in one year. due to reduced technology and talent exchanges.
Innovation quality measured the relative citation
strength of the patents, defined as the number of The researchers also noted that for China,
citations a firm’s patents received compared to other decoupling with the U.S. may be a proxy, perhaps to
patents in comparable years and technology classes. a lesser extent, for decoupling with the rest of the
developed West. In contrast, bilateral decoupling
• Decoupling for China’s firms: short-term likely does not mean the U.S. would decouple with
benefits, long-term costs. Sectors marked by other tech-important nations. Such an asymmetry
increasing U.S.-China technology decoupling may contribute to the more one-sided effect of
were associated with significantly higher rates of decoupling on firm productivity and valuation in
indigenous innovation by China, as measured by China compared to the U.S.
domestic patenting outputs, in the same field one
year later. But, this effect mostly disappeared after
two years. The higher rates of domestic innovation
were not associated with any decline in innovation
quality. However, over a horizon of two to three
years, heightened decoupling was also associated
with lower firm productivity and valuation.
More specifically, researchers projected that a
hypothetical increase in U.S.- China technology
SOUTH CHINA BUSINESS JOURNAL 22
