Working Paper: NBER ID: w19249
Authors: Thomas J. Holmes; Ellen R. McGrattan; Edward C. Prescott
Abstract: Despite the recent rapid development and greater openness of China's economy, FDI flows between China and technologically advanced countries are relatively small in both directions. We assess global capital flows in light of China's quid pro quo policy of exchanging market access for transfers of technology capital--accumulated know-how such as research and development (R&D) that can be used in multiple production locations. We first provide empirical evidence of this policy and then incorporate it into a multicountry dynamic general equilibrium model. This extension leads to a significantly better fit of the model to data. We also find large welfare gains for China--and welfare losses for its FDI partners--from quid pro quo.
Keywords: Foreign Direct Investment; China; Technology Transfer; Market Access; Quid Pro Quo
JEL Codes: F23; F41; O33; O34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Quid pro quo policy (F13) | FDI inflows (F21) |
| Quid pro quo policy (F13) | Welfare gains for China (D69) |
| Quid pro quo policy (F13) | Welfare losses for FDI partners (F23) |
| Technology capital transfers (F21) | FDI inflows from technologically advanced countries (F21) |
| Technology capital accumulated by Chinese firms (D25) | FDI inflows from advanced economies (F21) |
| Quid pro quo policy (F13) | Technology transfers confined within China (F16) |