China’s Joint Venture Policy and the International Transfer of Technology
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China’s Joint Venture Policy and the International Transfer of Technology
Kun Jiang,
Wolfgang Keller,
Larry D. Qiu,
William Ridley
Feb 06, 2019
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The ongoing trade dispute between China and the United States has offered few signs of an immediate resolution. Claims by the U.S. government of unfair trade practices on China’s part center on what the Trump administration argues are abusive practices deriving from China’s investment rules. Specifically, multinational firms seeking to conduct foreign direct investment (FDI) in China are often required to form legal business relationships with a domestic Chinese partner, typically in the form of international joint ventures (IJVs) that establish a new offshoot firm. These relationships – most often required in high-tech manufacturing industries such as automobile production, electronics, pharmaceuticals, and advanced chemicals – are characterized by explicit technology transfer requirements wherein the rights of the foreign intellectual property holder are often severely curtailed.
I JV partnerships typically require the foreign firm to transfer proprietary methods, designs, and other know-how to the joint venture firm. The implicit objective of such a policy is to foster the transfer of advanced foreign knowledge and trade secrets – a feature that foreign firms are forced to reckon with as the price of doing business in the world’s largest market. China has recently taken steps to liberalize its joint venture requirements in certain industries, but the policy environment remains one in which a technology transfer is expected of foreign investors. For instance, while China’s government was recently able to lure automaker Tesla to establish a production line in Shanghai by allowing the company to wholly own its factory, the investment agreement still entails cooperation with local authorities on R&D and technology.
Foreign Direct Investment and the Diffusion of Knowledge
One of the primary benefits of foreign investment for a host country is exposure to advanced foreign processes, management practices, and designs. In principle, this exposure should enhance the competitiveness of domestic firms, who will benefit from the technology transfers that arise in the form of higher productivity and expanded innovative capacity. China’s foreign investment policy is grounded in such a premise, as the original proponents of the outward-looking foreign investment policies that began in the late 1970s argue that opening up to foreign investment is the most efficient way to obtain foreign technology.
A sizable literature has uncovered evidence on the existence of such technology transfer effects. The foundational studies in this area – for example, those of Javorcik (2004) or Keller and Yeaple (2009) – show that FDI generates broad knowledge spillovers on host country firms as multinational investors transfer their technology and methods to their foreign affiliates. These effects are diffused both directly and indirectly to domestic firms, who, as levels of foreign investment increases, tend to exhibit higher levels of productivity or engage in more knowledge creation.
For foreign investors, the benefits availed by joint...