Quid Pro Quo, Knowledge Spillover and Industrial Quality Upgrading

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. ∗Contact: Bai: Harvard Kennedy School and NBER (email: jie bai@hks.harvard.edu); Barwick: Department of Economics, Cornell University and NBER (email: panle.barwick@cornell.edu); Cao: Department of Economics, Stanford University (email: shengmao@stanford.edu); Li: Dyson School of Applied Economics and Management, Cornell University, NBER and RFF (email: sl2448@cornell.edu). We thank David Atkin, Loren Brandt, Kerem Cosa, Dave Donaldson, Jeffery Frankel, Gordon Hansen, James Harrigan, Robert Lawrence, Ernest Liu, Benjamin Olken, Dani Rodrik, Heiwai Tang, Daniel Xu, and seminar and conference participants at the Beijing International Trade and Investment Symposium, Bank of Canada-Tsinghua PBCSF-University of Toronto Conference on the Chinese Economy, China Economics Summer Institute, Georgetown University, George Washington University, Harvard Kennedy School, Johns Hopkins University, Microsoft Economics, MIT, National University of Singapore, Stanford IO, University of Toronto, University of Virginia, University of Zurich, UPenn China Seminar and World Bank Development Research Group for helpful comments. We thank Ann Xie and Minghuang Zhang for generous data support and Luming Chen, Yikuan Ji, Yiding Ma, Binglin Wang, and Yukun Wang for excellent research assistance. All errors are our own.