Joint Effects of Ownership and Competition on the Relationship between Innovation and Productivity: Application of the CDM Model to the Chinese Manufacturing Sector

On the basis of a rich panel data set of large- and medium-sized Chinese manufacturing enterprises, we observe that different types of firms (i.e., state-owned enterprises [SOEs], foreign-funded ownership [FFO] of firms, Hong Kong-Macau-Taiwanese [HMT] companies and privately-owned firms) exploit different stages of the innovation - productivity chain depending on the extent of market concentration. By applying a modified CDM model, this study reveals that SOEs tend to be more active in making innovative decisions and pursuing innovative investments but are less efficient in terms of innovation output and labour productivity, whereas FFO firms have relatively high labour productivity but are less active in the first three stages of the innovation - productivity chain. Market competition favours SOEs in the production of additional innovation products. Foreign firms are efficient in labour productivity if they are operating in a concentrated market. By using the metaphor of DNA, this study explains the heterogeneity among these different forms of ownership and generates several managerial implications.