Technology Spillover in China

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Technology Spillover in China
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Why could FDI Affect Innovation?

• Local firms can learn about the designs of the
  new products and technology, e.g. through reverse
  engineering, and then improve upon them to come
  up with new innovations (the Japan Experience).
• Inward FDI can cause spillovers to local firms
  through labor market turnover whereby skilled
  workers move to local firms.
• Demonstration effect

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How could FDI Help Spread Technology?

• Horizontal, Intra-industry Spillovers
• Competition by firms within the same industry
• Human capital shifting employment
• Informal exchange between managers
• Vertical, Inter-industry Spillovers
• Channels above
• Vertical linkages with suppliers and buyers in
  up- and down-stream industries

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FDI and Technology Spillover(Liu, 2002)
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Data

• Shenzhen Statistical and Information Yearbook
• Twenty-nine manufacturing industries 1993-1998
• Hi is defined as the share of capital owned by
  foreign investors in industry i.
• Hij is the share of capital owned by foreign
  investors with ownership j in industry i.
• Conclusions?

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Technology Transfer and Productivity (Hu et al.
2005)

• Data
• The survey of Large and Medium Size Enterprises
  by NBS.
• They accounts for 59 of Chinas total industrial
  output.
• Spanning 1995-1999
• Include 29 two-digit industries and 400
  four-digit industries.

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Conclusions

• RD and foreign technology transfer have higher
  returns than domestic technology transfer.
• Effect of outside technology transfer also
  depends on RD level of a firm.

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The Effect of FDI on Innovation in China (Cheung
and Lin, 2004)

• Evolvement of the patent law in China
• 1985 The patent law of China was enacted
• 1993 The patent law was substantially amended,
  with major revisions including
• Extending patent length from 15 to 20 years for
  invention patents
• Extending patent length from 5 to 10 years for
  utility model and external design patents
• The enforcement of the patent law has also been
  greatly improved since 1993.
• 2000 The second revision eliminated the old
  provisions that prevent SOE to sell their
  patents. New provisions are also offered to
  reward enterprise employees to innovate.

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Empirical Evidence

• Data
• Use the province-level number of patent
  applications as a measure of innovations.
• Findings
• FDI only has robust and significant positive
  effect on applications for external design
  patents a 1 increase in FDI inflow lead to a
  0.15 increase in the number of applications.
• This is consistent with the demonstration effect
  of FDI.

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Clustering of FDI and Enhanced Technology
Transfer (Thompson, 2002)

• Hypothesis FDI into geographical industry
  clusters should transfer technology more
  effectively than FDI in the same sector but which
  is geographically dispersed.
• This is found to be the case for garment firms in
  Peru Firms within a tight geographical cluster
  performed better than those that were dispersed.

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Empirical Evidence

• Hong Kong businesses generally account for nearly
  60 of total investments in China by value during
  1979-92.
• The Garment industry accounts for the largest
  sectoral proportion (20) of Hong Kong derived
  FDI to China by number of firms.
• Data
• The initial sample includes all the firms listed
  as members of the Federation of Hong Kong
  Industries.
• Four surveys were carried out on these firms in
  1992, 1993, 1995, and 2000.
• The authors themselves surveyed about 300 firms
  with a 38 response rate.

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Findings

• Clustered FDI appears to attract more suppliers
  than dispersed FDI. These suppliers seem to
  compete hard with one another and upgrade their
  products and services.
• In terms of horizontal effects, clustered FDI
  facilitates technology and knowledge spillovers
  more than dispersed FDI.

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Assembly Trade and Technology Transfer (Lemoine
et al., 2004)

• Chinas foreign trade expanded by almost 15 per
  year on average during 1980-2001.
• Industrial exports rose by 20 per year with
  rapid diversification.
• During the 1980s, Chinas export were driven by
  textile products, and during the 1990s by
  electric and electronic products.
• Trade of processed products accounts for around
  50 of all trade.

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Conclusion

• The local content of processed exports and the
  evolution of domestic exports tend to indicate
  that there are limited linkages between the
  outward-oriented sector and the rest of the
  economy.
• The assembly trade has driven the technological
  upgrading of Chinas foreign trade, but has not
  helped the upgrading of the traditional exporting
  sector, which are based on domestic outputs.

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Questions Unanswered

• Besides the FDI and trade, what has happened
  within China
• Changes in institution that facilitate technology
  spillover?
• SOE privatization and its technology spillover?
• How do universities in China spread their
  innovations?
• How are innovations themselves correlated over
  time and over space?

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Technology vs. Institutional Innovation (Huang
and Rozelle)

• Data
• 13 rice-growing provinces 1975-90
• Findings
• 1978-84 Technology adoption is the most
  important determinant of rice yield growth,
  accounting for 40 of the change. Institutional
  reform accounted for 35.
• 1985-90 Technology accounts for all of the
  increase in rice yields.

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Questions Unanswered

• What are the patterns and economic significance
  of soft technologies?
• Technology generally means any knowledge that can
  improve economic efficiency.
• Hard technology refers to patentable
  blueprints, plans, mechanisms, formulae and the
  like. Soft technology refers to everything
  else, like organizational, marketing and other
  managerial knowledge and skills.
• What determines the growth rates of the
  technology stock?
• Growth dynamics of innovations
• Technology desolation dynamics
• What is the effect of institution (law, culture,
  current economic system, etc.) on innovation?
• What is the return to innovation (private and
  public)?

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Technology Spillover

• A Dilemma
• On one hand, we want innovations flow freely
  across the nation to maximize their value
• On the other hand, free adoption of innovations
  may give innovators little incentive to continue
  innovating.
• Is patenting an ideal solution?
• Efficiency in technology spillover determines the
  value of innovations, but it is the growth rates
  of innovations that determine long term growth
  rate of an economy.