Quid Pro Quo, Knowledge Spillover, and Industrial Quality Upgrading: Evidence from the Chinese Auto Industry

Jie Bai, Panle Jia Barwick, Shengmao Cao, Shanjun Li

NBER Working Paper No. 27644
Issued in August 2020
NBER Program(s):Development Economics, Industrial Organization, International Trade and Investment, Productivity, Innovation, and Entrepreneurship

While there is a vast body of research on the benefits of FDI in developing countries, whether and how the form of FDI matters have received limited attention. In this paper, we study the impact of FDI via quid pro quo (technology for market access) on facilitating knowledge spillover and quality upgrading. Our context is the Chinese automobile industry, where foreign firms are required to set up joint ventures with domestic firms in return for market access. Using a unique dataset of detailed quality measures of vehicle performance, we show that affiliated joint ventures and domestic firms share a greater similarity in quality strength compared to non-affiliated pairs. The results suggest that quid pro quo spurs additional knowledge spillover to affiliated domestic firms, in addition to any industry-wide spillover as a result of the presence of foreign firms. The identification relies on within- product quality variation across different dimensions, and the results are robust to a variety of specifications. We rule out endogenous joint venture network formation, overlapping customer base, or direct technology transfer via market transactions as alternative explanations. Analyses leveraging additional micro datasets on part suppliers and worker flows among firms demonstrate that supplier network and labor mobility are important channels in mediating knowledge spillover. On the other hand, while ownership affiliation facilitates learning, such a requirement is not a prerequisite for knowledge spillover. Counterfactual exercises show that the role of quid pro quo is modest in explaining the overall quality improvement experienced by domestic firms.

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Document Object Identifier (DOI): 10.3386/w27644

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