Study Shows Big Benefits to Chinese Companies From Joint Ventures with U.S. Firms

April 12, 2018

In the trade battle between the U.S. and China, joint ventures play a starring role. The U.S. is threatening China with tariffs on $150 billion of goods mainly because it claims that Beijing forces the U.S. partners to transfer technology unwillingly to Chinese partners—and says that must stop.

[Bob Davis | April 12, 2018 | WSJ]

Now four economists, with remarkable timing, published a study showing that the Chinese firms in joint ventures benefit enormously from the arrangements. They also find that U.S.-Chinese joint ventures are the most advantageous to the Chinese partner, compared to joint ventures with Japanese, Taiwanese or Hong Kong partners.

“There is substantial technology transfer both to the joint venture and the Chinese joint venture partner,” the economists find in a paper published by the National Bureau of Economic Research, and the gains are long-lasting.

The paper doesn’t address the issue of whether the U.S. firms had their arms twisted to transfer technology. University of Colorado economist Wolfgang Keller, one of the co-authors, says he doubts that was largely the case.

“Are the claims of the U.S. about technology ‘piracy’ justified?” Prof. Keller said in an e-mail. “My sense is that these U.S. claims are exaggerated.”

“The Chinese were more aggressive about trying to learn from foreign companies,” Prof. Keller continued, “but one could argue that that is balanced out by the larger Chinese market” that foreign firms can tap through their JVs.

The three other co-authors are William Ridley of the University of Colorado, Kun Jiang of the University of Nottingham and Larry Qiu from the University of Hong Kong.

Joint ventures are common in business, but China was especially interested in that form of investment. “Joint ventures generate more local technology learning, as well as access to intellectual property and foreign capital,” the paper explains. Foreign firms didn’t go into these ventures blindly. They tended to choose larger, more profitable Chinese partners, especially those with government connections.

“Is China unusual in pursuing this policy?” said Mr. Keller. “Probably yes, but at the same time China is also the largest (and fast-growing) market, so giving access to the Chinese market was ‘worth more’ than giving access to a smaller market. From this perspective, both the costs and the benefits from doing FDI in China are larger than elsewhere.”

The technology transfer was so successful for China, say the authors, that entire Chinese industries benefited as firm after firm modernized.

Why were joint ventures involving U.S. firms more productive? The authors figure that’s because the U.S. firms “tend to be closer to the world’s technology frontier than non-U.S. firms,” and as a result they transfer more or better technology to their Chinese venture.

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