Ownership and Innovation in Chinese Solar Photovoltaic Firms: An Analysis of the Effects of State, Private, and Foreign Shareholding on Patenting Performance Radomir Tylecote Thesis submitted for the award of Doctor of Philosophy (Ph.D.) The copyright of this thesis rests with the author and is made available under a Creative Commons Attribution Non-Commercial No Derivatives licence. Researchers are free to copy, distribute or transmit the thesis on the condition that they attribute it, that they do not use it for commercial purposes and that they do not alter, transform or build upon it. For any reuse or redistribution, researchers must make clear to others the licence terms of this work. 1 Abstract This thesis is a quantitative study of the effect of ownership – by state, private and foreign shareholdings – on innovation by China’s solar photovoltaic (PV) firms. Using the country’s solar PV industry, I seek to explain the impact of proportions of these different types of shareholding (and within the state category shareholding by central, provincial, and municipal governments) on innovative capacity. This capacity is measured by firms’ rates and qualities of patenting. As Chinese economic growth falters, amid the “re-shoring” of certain manufacturing capabilities, the role of the state, and whether it is helping or hindering its economy’s – and Chinese firms’ – technological upgrading, is a vital question. This is particularly true in high-tech sectors, including solar PV, which the Chinese government deems essential for the country’s continuing economic growth. Through the solar PV industry, we investigate the role of the state, and how it is helping or hindering Chinese companies’ innovation. We employ a dataset covering 150 solar photovoltaic firms. This combines current and historical shareholding data for each firm, R&D expenditure data, and the firms’ patent output (all Chinese- registered patents and their related foreign registrations). The thesis employs a principal-agent theoretical template for the unique Chinese politico-economic context, developing this theoretical approach for the particular “multi-principal” scenario in Chinese high-tech firms (here we refer not only to the combinations of private and state principals, but also to the impact of local against central government). We demonstrate that higher state shareholding leads to higher R&D spending relative to the size of solar PV firms; among state shareholding, local state ownership is shown to be better than central state ownership at generating innovation (which we measure as patent performance). Firms that combine private and state shareholding, especially minority state-owned firms, are superior innovators than purely private or purely state-owned firms. For particularly innovative patenting, foreign shareholding was found to be beneficial, and finally, central state ownership was more likely to lead to the generation of the less challenging types of solar PV technologies, whereas local state ownership was more likely to lead to “core” PV technologies being patented. 2 Contents List of Tables and Figures 6 List of Appendices 7 Declaration 9 Acknowledgements 10 Abbreviations 11 1. Introduction 1.1 Background to the thesis 13 1.2 Innovation and entrepreneurs in the Chinese economy 14 1.3 The international market for solar photovoltaics and the position of Chinese firms 15 2. Literature Review 2.1 Aims of the literature review 19 2.2 National Innovation Systems 19 2.2.1 Core approaches to innovation systems 20 2.2.2 Innovation systems, the state and reform 24 2.2.3 Innovation systems and agency theory 26 2.3 Principal-Agent Theory Introduction 27 2.3.1 Principal-agent theory 27 2.3.2 Moral hazard 29 2.3.3 Incentives 31 2.4 Principal-Agent Theory in High-Tech Innovating Firms 33 2.4.1 The generation of capabilities by firms 33 2.4.2 The role of the principal-agent relationship in innovation in high-tech firms 34 2.4.3 Information asymmetry and moral hazard 35 2.4.4 Measurement responses and incentives 37 3. Discussion of the Chinese innovation system 3.1 Structures and systems of state control 40 3.1.1 Proportions and trends of ownership 40 3.1.2 The state’s management of its firms 41 3.1.3 Cadre assessment 44 3.1.4 State listing and management of firms 46 3.1.5 Government procurement and standard setting 47 3.2 Impact of Reform and the Medium- to Long-Term Plan 50 3.2.1 The continuation of state ownership and R&D 55 3.3 R&D funding patterns and firm innovation outcomes 56 3.3.1 R&D funding through central and local governments 58 3.3.2 State versus private ownership in R&D and innovation outcomes 62 3.3.3 Levels of state ownership and firm performance 66 3 3.4 China’s intellectual property system 69 3.4.1 The development of China’s intellectual property system 69 3.4.2 Patent Quality Trends 74 3.5 Summary 76 4. Application of theory to the Chinese innovation system 4.1 Applying Principal-Agent Theory in High-Tech Innovating Firms in China 77 4.1.1 Outline of principals and agents 77 4.1.2 Incentivisation and assessment 78 4.1.3 Principal-agent conflict 79 4.1.4 Information asymmetry and moral hazard in the Chinese innovation system 80 4.1.5 The divergence of our case from classical theory 81 4.1.6 Ownership, governance and innovation in different Chinese enterprise types 82 4.2 Discussion of patent studies 86 4.2.1 Rationale for the study of patents 86 4.2.2 Approaches to patent valuation 88 4.2.3 The connection of patents to R&D 90 4.2.4 Firm protection and infringement 91 5. The Chinese solar PV industry 5.1 Introduction to solar PV technologies 94 5.1.1 Solar PV: production process and technology types 94 5.1.2 Functioning of a solar PV cell 95 5.2 Chinese solar production and innovation 98 5.3 China’s institutional governance of the solar PV sector 102 5.3.1 Resulting R&D patterns in the Chinese solar PV industry 103 5.3.2 The global context of Chinese solar PV R&D 105 6. Methodology 6.1 Introduction 107 6.2 Interviewing methods 108 6.3 Methods for obtaining quantitative data 111 6.3.1 Methods for patent search and compilation process 111 6.3.2 Methods and process for establishing firm shareholding levels, R&D, and control data 116 6.4 Variables 117 6.4.1 Dependent variables 117 6.4.2 Independent variables 118 6.4.3 Control variables 119 6.5 Treatment of data for regressions 122 6.5.1 Cross-section versus panel data regressions 122 4 7. Theoretical Framework and Hypotheses 7.1 Theoretical framework – resumé 124 7.2 The application of the theoretical framework to the different ownership categories 127 7.3 Sub-samples and data available 133 7.4 Core arguments and hypotheses 135 8. Data Analysis 8.1 Preparatory econometric data analysis 141 8.1.1 Coding 141 8.1.2 Creating the data file 147 8.1.3 Screening the data: checking categorical and continuous variables 147 8.1.4 Preliminary analyses: categorical variables and continuous variables (skewness and kurtosis) 148 8.1.5 Factor analysis 148 8.1.6 Reverse causation 150 8.1.7 Interpolated figures 152 8.2 Hypotheses: calculations and results 153 9. Discussion and Conclusions 9.1 Introduction 205 9.2 Results and Contributions 205 9.3 Practical Implications 209 9.4 Limitations and Recommended Future Research 213 10. Bibliography 215 11. Appendices 240 5 List of Tables and Figures Please note that the list of tables that follows does not include the quantitative analysis output tables. Tables Table 1: Performance assessment criteria in SASAC central SOEs Table 2: Spending by central government on main R&D programmes by RMB 10,000 Table 3: Government expenditure for science and technology by RMB100m Table 4: R&D funding in China by source: selected years from 1985–2003 (%) Table 5: Early Chinese solar photovoltaic cell manufacturers: equipment sources, technology, and production (1995) Table 6: Variable Names in Output Table 7: Oblimin Rotation: Pattern Matrix Table 8: Reverse Causation Results Summary Table Figures Figure 1: Structure of the State-Owned Assets Supervision and Administration Commissions (SASACs), Government, and state-owned enterprises (SOEs) Figure 2: State Council control and Chinese institutions Figure 3: The technology improvement curve Figure 4: China’s R&D Expenditure (2000-2010; RMB 100m) Figure 5: China’s overall R&D expenditure by performer (2010) Figure 6: Level of government ownership and market orientation Figure 7: Stages of the development of the Chinese patent system Figure 8: Timeline of China’s major intellectual property rights (IPR) laws and regulations (to 2005) Figure 9: The solar photovoltaic value chain Figure 10: Functioning of a solar photovoltaic cell Figure 11: Tetrahedrally bonded crystalline silicon 6 Figure 12: Silicon doping with phosphorus and boron Figure 13: A solar photovoltaic system Figure 14: Overview of the research process Figure 15: Patent uploading Figure 16: Data extracting Figure 17: Redeye patent filtration Figure 18-21: Maps of agglomeration of patenting solar photovoltaic firms across China Figure 22: Theoretical framework List of Appendices Appendix 1: Table of interviews Appendix 2: Literature review tables Appendix 3: Mindmap of solar photovoltaic technologies Appendix 4: Patent search terms Appendix 5: Total Patent Boolean searches Appendix 6: Chinese patent Kind Codes Appendix 7: International Patent Classification (IPC) code examples Appendix 8: Complete information provided in a patent Appendix 9: Agglomeration rating compilation Appendix 10: Coding of variables for SPSS Appendix 11: Factor Analysis full output Appendix 12: Reverse causation test 1 Appendix 13: Reverse causation test 2 Appendix 14: Reverse causation test 3 Appendix 15: Reverse causation test 4 7 Appendix 16: Reverse causation test 5 Appendix 17: Hypothesis 6b full correlations Appendix 18: ANOVA testing for Hypothesis 8b core technologies Appendix 19: ANOVA testing for Hypothesis 8c related technologies 8 Declaration I hereby declare that the entire contents of this thesis are my own work, unless they are otherwise cited as external sources.