Here - Beedie School of Business - Simon Fraser University

an imbalanced panel dataset of 474 industry sectors in China during 1998–2002. To check
the reliability of the Census data, we have performed several small subsample tests (detailed
in the appendix); the test results add support to the reliability of the Census data.
Statistical Model
In this study, we adopted standard panel-data regression models. Contingent on the
different assumptions on the properties of the unobserved industry-specific characteristics,
there are two types of estimation models: fixed-effects and random-effects models (Greene,
2003). We employed both models to analyze the data and performed Hausman tests to
examine which estimation model is the correct specification for our study.
Theoretical Variables
Dependent variable. In this study, the dependent variable is innovative capabilities of
indigenous firms in industry i at year t. Note that we define indigenous firms as those with no
foreign investment. We measure innovative capabilities using product innovation, as proxied
by the share of market value of new products in all products produced by indigenous firms in
industry i at year t. 3 In the Census data, new products are defined as “those developed and
produced for the first time in China in the past three years, including those adopting
completely new technological principle or design, or those substantially improved compared
with existing products in terms of structure, materials, and design such that these new
products have significant improvement in functionality or performance (Zhu, 2000).”
3
Scholars researching innovations have adopted different measures for innovative capabilities. For example,
some use questionnaires to ask managers or industry experts directly about the innovativeness of companies
(Bell, 2005; Subramaniam & Youndt, 2005), while others use the frequency with which one company’s
patents are cited (Phene et al., 2006). In our study, since our data are from an industry-level secondary dataset,
we do not have any questionnaire results or patent citations which we can use as an alternative measure for
firms’ innovative capabilities.
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