Technological Progress, Open Economy

This paper critically explores how a country can quicken the process of its own technologyprogress through international technology transfer or spillovers resulting from international tradeand foreign direct investment in an open economy. Firstly, we discuss the effects of technology diffusion or spillovers on technology progressand economic growth in a framework of endogenous growth, which involves international tradeand foreign direct investment respectively, and examine the channels through which technologyspillovers occur and its affecting factors. China has made a much progress in international business activities since its opening-upreform. Based on the theoretical analysis, this paper empirically investigates the effects of tradeand FDI on China's technology progress, the upgrade of industrial structure and industrialdevelopment. The results of the study are interesting. We find that: (1) the effect of FDI on China'sTFP is positive and significant, implying that the entry of foreign firms not only bring muchcapital, but also much advanced technology, management experience and marketing skills, whichgenerate productivity spillovers to local firms in China. However, the effect of international tradeon TFP is insignificant and negative, mainly because China's comparative advantage still lies inlabor abundance. (2) FDI plays an active role in China's manufacturing industries, moreover itsspillover effects is stronger in capital-intensive industry than in labor-intensive industry. Thedegree of foreign equity is not the determinant of the extent of spillover effects. Based on thisresult, we draw a conclusion that the extent of capital density of the industry, the scale of firms,technology level and the characteristics of FDI are the important elements in affecting technologyspillovers of FDI. (3) The positive spillovers from FDI has been found in local firms of Chinasince 1990's, however, in 27 provinces excluding three municipalities, the spillover effect of FDIin 2001 is lesser than in 1996. The spillover effect of FDI in central and west areas is stronger thanthat in east area excluding three municipalities; while there is no significant difference inspillovers of FDI between the central and west areas as well as in time trend of these two areas.Therefore, we argue that the difference of spillovers of FDI in 1996 and 2001 arises out of the eastcostal area excluding three municipalities. The reason of this result is that the decrease of thetechnology gap between local firms in east area and multinational enterprises weakens thespillover effects of FDI. (4) Foreign firms play a pivotal role in transforming China's comparativeadvantage from resource-intensive products to labor-intensive products, furthermore their entry ofcapital/technology-intensive industry lowers the comparative disadvantage of trade structure ofChina, but on the other hand, the intermediate goods which foreign firm need in production largelyrely on import, not on local suppliers, thus implying that the forward and backward linkagespillover effect of FDI in inter-industry are not be identified. (5) Since the mid of 1990's, the rapidimprovement of high-tech industry of China is closely related to the FDI, and foreign firms play aleading role, not only in production, but in innovation activities.