During the Young Scholars Forum, ZIBS Assistant Professor CHEN Xiaohua kicked off the session with a presentation on "How Economics and Business Lead High-Tech Industry?". Here's the review:

Macroeconomics mainly studies two topics: one is economic growth, and the other is economic fluctuations. Economic cycles have different frequencies. Short-run business cycles vary from half a year to 8 years and are mainly motivated by prices, supply, and demand; medium-term cycles vary between 8 and 32 years. Current literature believes those are mainly the credit cycles, which can be measured by housing prices and private credit. However, this research found that such medium-term cycles are not only in the financial sector but also in the real world.

The research studied fluctuations ranging from half a year to 32 years. CHEN Xiaohua employed wavelets to detect the real GDP of the US. Studying 24 countries, she found that the medium-term cycles over around one to two decades were the most significant cycles for national economies.

To study economic cycles, particularly medium-term cycles, financial factors cannot be ignored. Credit to the private sector in the US has been found in the 10-year-cycle with the largest amplitude. We found that credit to GDP overall keeps increasing, which indicates the increasing significance of the financial sector.
-Financial Accelerator (Bernanke et al, 1999)

The function of the financial sector in the real economy is the financial accelerator developed by Bernanke in 1999, who developed such a model. The model can eventually be summarized into two equations:

Rk is the expected return of capital, and r is a risk-free return. The ratio between the expected return of capital and the risk-free return can be written as a function of leverage. Such an equation derives the persistence effect. A higher net worth generates a higher expected return on capital, which then decreases the threshold, increases the loan amount, and then increases the total capital. With the increase in total capital, the net worth next period will increase further. This is the persistence effect: with the start of a net worth increase, it generates the net worth increase further in the next period.

Besides being a financial accelerator, technology innovation is another important factor for economic growth and fluctuation. In the production function, like the Coob-Douglas function, technology is an important production factor. Technology innovation itself can lead to economic fluctuations. At the bottom of cycles, there will be clusters of innovation.

Her current research combines financial accelerators and technology innovation into a dynamic stochastic general equilibrium model and develops such a real-financial interaction mechanism to explain growth and fluctuation. The equilibrium system of the model is as shown.

The research develops such medium-term cycles, as medium-term cycles are the connection between short-run business cycles and long-run trends. In the model, there are households, banks, technology innovators, and final goods producers, stressing the linkage between technology innovation and the financial sector as the key to explaining medium-term cycles that connect economic cycles and trends.

High-tech industry development should be part of the macroeconomy. There's a need to detect such high-tech industry opportunities that can lead to economy growth and at the up-trend of the cycle, and also the financial accelerator would like to realize. With the study of macroeconomics, there could be a systematic understanding of technology innovation and industry.

o far, we have experienced six waves of the industrial revolution, from the steam engine to IT development. Every technological innovation has profoundly enhanced productivity and changed our way of life. Now we are experiencing a resource-efficient technology revolution, which is what we call the sixth wave of industrialization.

In this sixth industrialization, we are searching for smart solutions to resource productivity.

Based on the consideration of trends, social changes, and innovation platforms, the research found that demographic changes mean aging and a longer life, and the demand for health services and the bio-economy increases significantly. The number of elderly people in both China and the world keeps increasing. Also, the worldwide life expectancy will keep increasing. With such a big trend, CHEN Xiaohua's team began to search for business opportunities in biotechnology.

To sum up, the high-tech industry should be part of economic growth and fluctuations. Such a macroeconomy system is very helpful for us to detect the real and big chances in the business world. And also, high-tech industries could lead to economic growth. From the original tech to industrialization, there is a need to do business development and market investigation to figure out the meaning of innovation in the real world and the meaning of our humans. The development of tech innovation cannot be separated from economics, business, and finance, where business school and business students could play an important role.

*This article is based on the speech made by ZIBS Assistant Professor CHEN Xiaohua at ZIBS 2023 Forum. The views and opinions expressed in this article are those of the speaker and do not necessarily reflect the views or positions of ZIBS.