A Theory of Innovation: Market Transition, Property Rights, and Innovative Activity

The aim of this paper is to specify a theory to explain why transitions to a market economy cause a shift to a higher level of innovation. Marketization increases the power of economic actors relative to political actors, increases inter-firm competition, creates new opportunities for entrepreneurship, and subsequently motivates innovative activity. For our empirical application, we focus on China's transition economy, which offers a broad range of institutional environments to examine the relation between market transition and increasing innovative activity by entrepreneurs and firms.