Creator: Holmes, Thomas J., McGrattan, Ellen R., and Prescott, Edward C. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 486 Abstract:
By the 1970s, quid pro quo policy, which requires multinational firms to transfer technology in return for market access, had become a common practice in many developing countries. While many countries have subsequently liberalized quid pro quo requirements, China continues to follow the policy. In this paper, we incorporate quid pro quo policy into a multicountry dynamic general equilibrium model, using microevidence from Chinese patents to motivate key assumptions about the terms of the technology transfer deals and macroevidence on China’s inward foreign direct investment (FDI) to estimate key model parameters. We then use the model to quantify the impact of China’s quid pro quo policy and show that it has had a significant impact on global innovation and welfare.
Keyword: FDI, China, and Quid Pro Quo Subject (JEL): O34 - Intellectual Property and Intellectual Capital, O33 - Technological Change: Choices and Consequences; Diffusion Processes, F41 - Open Economy Macroeconomics, and F23 - Multinational Firms; International Business
Creator: Holmes, Thomas J., McGrattan, Ellen R., and Prescott, Edward C. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 687 Abstract:
It is widely believed that an important factor underlying the rapid growth in China is increased foreign direct investment (FDI) and the transfer of foreign technology capital, which is accumulated know-how from investment in research and development (R&D), brands, and organizations that is not specific to a plant. In this paper, we study two channels through which FDI can contribute to upgrading of the stock of technology capital: knowledge spillovers and appropriation. Knowledge spillovers lead to new ideas that do not directly compete or devalue the foreign affiliate's stock. Appropriation, on the other hand, implies a redistribution of property rights over patents and trademarks; the gain to domestic companies comes at a loss to the multinational company (MNC). In this paper we build these sources of technology capital transfer into the framework developed by McGrattan and Prescott (2009, 2010) and introduce an endogenously-chosen intensity margin for operating technology capital in order to capture the trade-offs MNCs face when expanding their markets internationally. We first demonstrate that abstracting from technology capital transfers results in predicted bilateral FDI inflows to China that are grossly at odds with the data. We then use the bilateral inflows to parameterize the model with technology capital transfers and compute the global economic impact of Chinese policies that encouraged greater inflows of FDI and technology capital transfers. Microevidence on automobile patents is used to support our parameter choices and main findings.
Subject (JEL): O34 - Intellectual Property and Intellectual Capital, O33 - Technological Change: Choices and Consequences; Diffusion Processes, F41 - Open Economy Macroeconomics, and F23 - Multinational Firms; International Business