Analysis on the dynamic relationship between the R&D capacity and trade of China's furniture industry

China's furniture industry has grown rapidly over the past 10 years, making China an important furniture exporter in the world. This paper focuses on the evolution path of R&D capacity and trade of China's furniture industry and their relationship, analyzes the impact of changes in external factors on R&D capacity, trade and profits, and makes predictions for R&D capacity, trade and profits. A dynamic model of R&D capacity, trade and profits for China's furniture industry is established in this paper based on the data from 1993 to 2008, five methods are used for model estimation and the result derived from the 3SLS method is selected according to the performance of the empirical estimation. The result of regressions shows that the R&D capacity of China's furniture industry acts negatively on its net exports and profit, which means the R&D capacity does not contribute much to net exports and profit increment, in spite of the noticeable increases in research expenditure. Also, the result indicates that the R&D efforts of China's furniture industry are more oriented towards enhancing the industry's learning capacity, but less towards encouraging innovation capacity. Research expenditure grows rapidly mainly because Chinese furniture manufacturers, taking advantages of their comparative advantages in cheaper labors, tend to gain market access by simply copying their competitors' products. The prediction of this model for 2009~2015 shows that China's furniture industry will continue to grow steadily if no substantial changes take place in the current conditions. The present development of China's furniture industry is somehow irrational and its competitive advantage will be easily lost when labor cost increases or when there is sharp fluctuation in the market. Therefore, the R&D efforts of China's furniture industry shall have to shift their emphasis from fostering learning capacity to fostering innovation capacity.