Growth Lab Research Seminar - Firewall for Innovation

The Growth Lab's Research Seminar series is a weekly seminar that brings together researchers from across the academic spectrum who share an interest in growth and development

Speaker: Jie Zhou, Phd Candidate in Economics, MIT

Abstract: Do protectionist policies foster domestic growth and innovation in the digital economy, and if so, how? This paper investigates the impact of the Great Firewall (GFW) in China – the world's largest system of internet regulation – on the development of domestic mobile apps. By blocking foreign apps at times determined mostly by political considerations, the GFW prompted a 30% user base expansion for Chinese substitute apps (identified through their baseline text descriptions). Monthly data on these apps’ underlying technologies, extracted from their compiled source code, reveal that Chinese substitute apps accelerated their innovation efforts, with in-house development increasing by 14% two years after the blockage. This technological progress spilled over broadly post-blockage, as both domestic and foreign apps adopted more Chinese technologies. I further show that increased access to data was one important driver. Chinese apps requested more types of sensitive data and were more likely to share user data access with outside firms after their foreign substitutes were blocked. These increased types of user data generate innovation; quasi-random variation in the introduction of new data access raises in-house technology development. Finally, using data-sharing networks between app developers, I show that in-house development also increased at the firms that user data was shared with. In summary, protectionist policies brought about through China's GFW boosted its app industry, potentially contributing to China's leadership role in this fast-growing industry.