The Effect Of Factor Market Distortion On Technological Progress In Transformation Economies

For developing countries, it is inevitable that the degree of elements market development lags behind the products market in some stages. Whether an economy could achieve sustained high growth depends on the digestion and absorption of foreign technology spillovers and the amount of its own capability of technological innovation.However, China has achieved great economic success which relies mainly on the consumption of material resources, rather than technological progress stimulating. When China’s short-term factor price distortions have promoted rapid economic growth, whether or not does it exert any inhibitory effect over technological progress- the source of sustainable economic development? For seeking international experiences on whether factor distortions barrage technological progress, this paper, chooses Russia as the same transition economy for further analysis, expecting this could provide some evidence to the effect of Chinese factor market distortion on technological progress, and propose some appropriate policy recommendations.Through literature review, the paper summarizes five mechanisms between factors market distortion and technological progress derived from R&D capital investment, R&D investment in personnel, international trade overflow, FDI overflow and patent overflow.After that, based on monopolistic competition framework, we have also deduced the mathematical model of factor market distortions and technological progress, which theoretically proves their relationship. Further, through the statistical analysis of China and Russia on the factor market distortions and technological progress, we have gave and preliminary verified the following 2 hypothesis of this paper: 1) Factor market distortions in transition economies may show a negative correlation with its technical progress, and to a certain extent, it can inhibit its technical progress by R&D capital and personnel investment, technology spillover and other ways; 2) In the process of transition economies’ factor market distortions inhibit technological progress, there may be threshold range for factors of technological progress, leading to different characteristics in different threshold range.Finally, taking China as an example, we choose its 1998-2012 annual provincial panel data of 30 regions, using measurement methods to study hypothesis in empirical test. The results show that the Chinese capital and labor factor price distortions significantly inhibit its technological progress after overcoming multicollinearity, heteroscedasticity endogenous and other issues. Under the five different threshold variables of R&D capital investment, R&D personnel investment, international trade overflow, FDI overflow and patent overflow, there are threshold ranges. Moderate elements of distortion can be in exchange for "rent" to provide funding for the five channels of technological progress. But when each variable goes across the threshold after a certain threshold, their roles on TFP growth would tend to be more harmful than good.