Quid Pro Quo, Knowledge Spillover and Industrial Quality Upgrading

Jan 25, 2023

Author: Jie Bae

Abstract: Are quid pro quo (technology for market access) policies eﬀective in facilitating knowledge spillover to developing countries? We study this question in the context of 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 along multiple dimensions of vehicle performance, we document empirical patterns consistent with knowledge spillovers through both ownership aﬃliation and geographical proximity: joint ventures and Chinese domestic ﬁrms with ownership or location linkage tend to specialize in similar quality dimensions. The identiﬁcation primarily relies on within-product variation across quality dimensions and the results are robust to a variety of speciﬁcations. The pattern is not driven by endogenous joint-venture network formation, overlapping customer base, or learning by doing considerations. Leveraging additional micro datasets on part suppliers and worker ﬂow, we document that supplier network and labor mobility are important channels in mediating knowledge spillovers. However, these channels are not tied to ownership aﬃliations. Finally, we calibrate a simple learning model and conduct policy counterfactuals to examine the role of quid pro quo. Our ﬁndings show that ownership aﬃliation facilitates learning but quality improvement is primarily driven by the other mechanisms.

Seminar Notes:

Venue: CES Seminar 2020

Objective: To examine the importance of the joint venture requirement under quid pro quo in facilitating knowledge spillover

Importance: A lot of developing countries put restrictions on FDI, with the assumption that the form of FDI matters for domestic knowledge spillover. This paper measures the size of these spillovers in a specific context

Background: All car companies that sell cars in China must form joint ventures with Chinese auto firms. Chinese goal - learning/intellectual property transfer

Foreign ownership share capped at 50%. 1 foreign partner can have multiple domestic partners and vice versa

Data & Key Variables:

Car quality measures from JD Power (2009-2014). Consumer surveys. Problems during first 90 days of ownership (IQS) and user ratings (APEAL)

Employment and work history from LinkedIn

Supplier information from Marklines

Patent transfers

Household survey - purchases and car choices

Methodology: Estimate residual quality, controlling for time, segment (SUV, midsized, etc), and dimension (fuel efficiency, engine quality, etc) fixed effects

Compare estimates of residuals by joint venture versus domestic

Results: There is evidence for knowledge spillovers by ownership affiliation, but quid pro quo is not the primary driver of upgrading. Comes through worker flows and suppliers

Key Table/Figure:

Dani’s Reading Notes

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