Innovation, Mark-Up and Firm Growth: Evidence from China's New Generation IT Industry

In this paper, we provide empirical evidence for understanding the growth behavior of China's new generation of information technology (IT) industrial firms and the impact of innovation and market power on them. Based on the data of China's new generation IT industrial firms covering the period 2000-2007, we use ordinary least square (OLS) and two-stage least squares (IV-2SLS) methods to study the effects of innovation and markup on the growth of China's new generation IT industrial firms in the framework of Gibrat's law. IV-2SLS estimations show that: (1) Innovation and markup have positive and significant effects on the firm's total revenue growth rate, but have no significant or negative effects on the growth rate of the firm's total assets and employment. (2) Innovation has a positive and significant effect on the firm's mark-up. The results indicate that for China's new generation IT industrial firms which are technology-intensive, improving the technological innovation and market power will reduce the firm's input and increase the firm's output. Innovation can significantly increase the firm's mark-up. (3) From the perspective of the dynamic evolution of a firm's growth, firm size has a negative and significant impact on the firm growth while firm age has a positive and significant impact on the firm's growth. In addition, we also examine the different effects of capital intensity and export demand on the firm's growth.