Half of my comments these days on IP issues involve industrial policy, specifically the government's plans to focus China's economic growth on creation of local IP/technology and use this as a platform to push the manufacturing and service sectors up the value ladder. You know, make more PCs instead of clothing, that sort of thing.
The recent NDRC changes to the foreign investment catalog reflected this policy. China is picking and choosing where it wants to allow in FDI. Real estate sector overheating? Limit FDI. Need for environmental technology? Encourage FDI in that area.
Excellent article on VOX by two U.S. economists takes a look at whether this is working. Conventional wisdom is that by restricting FDI and being aggressive in negotiating technology transfer by foreigners, China has been able to develop its technological know-how extremely quickly. Dangling the prize of market access to foreign firms, China has had sufficient leverage to extract what it wants from foreign tech enterprises.
Not so fast, say Bruce Blonigen (U. of Oregon) and Alyson Ma (UCSD):
China’s ability to gain technology from foreign firms and develop its own productive sophistication has actually not been that significant. First, while China’s range of exported products overlaps more with OECD countries than other less-developed countries, China sells these more-sophisticated products at a very large discount relative to competitors. This suggests that they are breaking into these “sophisticated” categories with relatively low-quality offerings.
Not sure I understand the point. Of course China breaks into these sectors with substantially lower prices, and of course these are lower quality goods. That's how adoption of new tech in a developing country works, right? The important thing is what happens after a few years when the developing country gets better at quality – can they compete with high quality and higher prices or not?
Next point. FIEs are nine times more productive than Chinese companies with no foreign investment.
These numbers highlight a significant vulnerability of China, particularly if there is little technological improvement taking place due to foreign presence. Foreign firms could ultimately switch to even lower-cost countries, taking their sophistication and productivity with them.
So how long should it take for a domestic industry to take advantage of technological spillover? Is this gap present in industries that have had significant foreign investment for many years or in areas that were recently opened to FDI?
Last, but not least:
There are also a few other pieces of evidence from the analysis of Chinese trade data that argue against any effective role for Chinese industrial policy in these areas. First, price/quality gaps do not close at all for sectors targeted by the Chinese government for foreign investment encouragement or for ones where foreign firms are restricted to have a domestic partner. Second, price/quality gaps do not close more in high-technology sectors that are supposedly being targeted by the Chinese government.
Gets us back to the age-old question about the ability of government to pick winners and losers. Blonigen and Ma support the orthodoxy of most American economists, which is not surprising. I was taught the same thing in most of my economics courses: the market is better at this kind of thing than the government.
I think a lot more research needs to be done on this, as the authors of this article point out. I would also add that it is personally very difficult to disregard all the anecdotal evidence I have gathered over the years from FDI clients, particularly the ones who complain about competition from Chinese firms in overseas markets. Almost always you can trace back the sophistication of the local firm to a JV or tech transfer license that occurred many years ago.