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How do joint ventures shape technology transfer and industrial upgrading in China’s auto industry—and what do the spillover effects reveal about the dynamics of global technology competition?

This paper, written by CID Faculty Affiliate Jie Bai and co-authors, evaluates China’s long-running “quid pro quo” industrial policy in the auto sector, which required foreign automakers to form joint ventures (JVs) with local firms in exchange for market access. Using a unique dataset of multidimensional vehicle quality ratings for nearly all car models sold in China from 2001–2014, the authors assess whether these JV requirements led to measurable knowledge spillovers and quality improvements for affiliated domestic firms. 

Key Findings:

• Spillovers via JV affiliation: Affiliated domestic firms systematically improved quality in the specific dimensions (e.g., fuel efficiency) where their JV partners were strongest. When a JV model scores one standard deviation higher in a quality dimension, the affiliated domestic partner’s model scores 0.098 standard deviations higher in that same dimension—relative to nonaffiliated domestic firms.
• Industry-wide spillovers accounted for: The empirical design isolates JV-specific effects by controlling for overall model quality, segment trends, and other confounders. These spillover patterns observed among affiliated partners were not explained by geographic proximity, consumer demand patterns, brand associations, or patent transfers.
• Channels of learning: Two mechanisms were especially important—worker flows and shared suppliers. LinkedIn-based job-switching data and component supplier networks show these relationships significantly strengthened knowledge diffusion, particularly for affiliated domestic firms.
• Magnitude of impact: Knowledge spillovers from JV affiliation accounted for 8.3% of the total quality improvement among affiliated domestic models between 2001 and 2014, equivalent to 31 fewer defects per model. This is in addition to industry-wide improvements. 

Impact and Relevance:

This paper provides evidence on a central question in development and trade policy: can forced technology transfer via joint ventures accelerate industrial upgrading? While the political economy of quid pro quo FDI policies is often contentious, particularly in high-stakes sectors like vehicles, rigorous evaluations of their effectiveness have been limited. Rather than relying on broad firm-level productivity metrics, the authors exploit detailed product-level quality measures to trace knowledge transfer across specific technological dimensions, offering a uniquely granular view into how spillovers happen, and for whom. The findings shift the debate from whether foreign investment is beneficial to how its structure shapes domestic capability-building. 
 
The findings are highly relevant to both emerging economies and advanced economies grappling with global technology competition. For developing countries, the paper underscores that domestic absorptive capacity (through labor, suppliers, and institutions) shapes the returns to FDI. Technology transfer is not automatic; it depends on institutional arrangements, sustained interaction, and complementary domestic reforms. At the same time, the relatively modest gains from quid pro quo cast doubt on arguments that such policies are essential for long-term competitiveness. This nuance is especially valuable in contexts like India, Brazil, or Vietnam, where governments weigh tradeoffs between openness and domestic capability-building. 
 
For policymakers in developed countries, including the U.S. and EU, the paper offers a counterpoint to narratives about coerced technology loss. The actual knowledge flows induced by JVs are measurable, targeted, and not uniformly transformative. This suggests that strategic engagement and safeguards—not wholesale disengagement—may be a more balanced response to concerns about technology diffusion. More broadly, the study contributes to a growing body of evidence that the design of FDI institutions determines whether globalization promotes domestic capability or deepens dependency.