The Effect of Technological Innovation and Market Size on Manufacturing Structure: Evidence from the World's Largest Tobacco Producer and Seller

Abstract

As the world’s largest tobacco producer and seller, China’s rapid development of the tobacco industry is inextricably linked to the promotion and support of the manufacturing industry. The optimization and adjustment of the manufacturing structure (MS) is critical in determining the competitiveness of the manufacturing industry. This study examines the impact of technological innovation and market size on MS optimization in China using provincial data from 2001 to 2016. We obtain the following main results. First, market size and technological innovation are important drivers in optimizing MS. Technological innovation increases productivity and results in the redistribution of production factors across industrial sectors,altering the industrial structure. The market size facilitates labor division, which boosts productivity. Second, institutional innovation is critical for optimizing MS. It strengthens the impact of technological innovation and market size on MS rationalization. Furthermore, the study’s findings are robust to a variety of estimation techniques, several alternative proxies for core explanatory variables, and a long list of control variables. An important implication of the study's findings is that the Chinese government should implement effective institutional reforms to accelerate China's manufacturing industry's development.China's tobacco industry, in particular, will achieve higher quality development based on the transformation and upgrading of the overall manufacturing industry.