Joint Ventures and Technology Adoption : A Chinese Industrial Policy that Backfired

Technology transfer from foreign firms has been important to economic growth in developing countries. To spur technology transfer, emerging market policymakers often mandate joint ventures (JVs) between foreign and domestic firms. Through knowledge spillovers, JVs should reduce the cost of technology acquisition for domestic firms. Yet domestic firm rents from JVs lead to a cannibalization effect that discourages innovation. Which of these opposing forces dominates is an empirical question. I address it with novel data on China's auto sector. Recent fuel economy standards provide plausibly exogenous variation in the fixed cost of producing powerful, heavy vehicles, which are associated with quality and higher profit margins. The standards required domestic firms to invest in technology upgrading to maintain or improve quality. Foreign firms already possessed the technology. In a difference-in-differences design, I show that relative to foreign firms, domestic firms reduced quality and price in response to the standards. Domestic firms with JVs reduced quality the most. This negative JV effect is larger than the negative state ownership effect. JVs can lead domestic firms down the manufacturing quality ladder, helping to reconcile FDI's positive role in the endogenous growth literature with mixed empirical findings at the country level