Input Trade Liberalization,Investment Flows And Quality Upgrading

To understand economic growth,a central theoretical question is how does measures of globalization like trade opening,promoting investment flows and reform exchange rate regime affect economic growth through R&D incentives.This question is of vital importance to understand how does trade and foreign investment affect technology catch-up and income convergence by developing countries,and get some sense about whether developing countries can harness the power of trade,foreign direct investment or technology adoption to realize catch-up.This essay tries to study the impact of three measures of opening-up on innovation aimed at product quality upgrading,the three measures are trade liberalization,promoting investment flows and reform of exchange rate regime.In chapter2,I document several stylized facts about input trade liberalization and FDI flows using Chinese data.First,the process of input trade liberalization after China joins the WTO is accompanied with a steady decline of imported input product scope,while the export product scope of these input importes remains slowly increasing with fluctuations.Motivated by the fact in Chapter2,I established a two-stage quality ladder endogenous growth model propelled by creative destruction to study the impact of trade liberalization on the R&D of input products.And there are three major conclusions:first,in open economy with or without trade cost,the R&D intensity features home market effect.Second,the impact of trade liberalization on R&D by southern firms depends on its development stage/distance to technology frontier and the size of downstream market compared to northern countries.Third,trade cost would distort the home market effect of R&D,by magnifying the home market effect of the north and dampen the home market effect of the south.From the above results we can conclude that in two stage production setup.the impact of input trade liberalization is quite different from previous findings.Chpater4 studies how FDI affect R&D and welfare under different FDI regimes,namely the no FDI regime,one-way FDI regime featuring investment flows from developed countries to developing countries with no reverse investment from developing countries to developed countries,and two-way FDI regime featuring two-way FDI flows between developed countries and developing countries.There are three major results:first,welfare is highest in two-way FDI regime relative to the other two regimes,and welfare in one-way FDI regime is higher than in no FDI regime.The jump from no FDI to one-way FDI to two-way FDI is a process of liberalizing cross border resource allocation constraint,this process speeds up the innovation by developed countries and imitation by developing countries by a continuous fall of production cost and R&D cost,so price index drops and income level rises,thus welfare is improved by each jump.Second,the jump from one-way FDI regime to two-way FDI regime increases the imitation scale by south,since they can lower the imitation cost by locating their R&D activity in north.The comparative statics on income gap shows that developing countries can utilize the human capital in developed countries to lower R&D cost,thus avoid being pushed into middle income trap by rising production cost and difficulty in innovation and upgrading.Third,R&D subsidies can promote R&D expenditures in both north and south,and providing R&D subsidy to southern firms can promote welfare in both countries.Chapter5 studies how does exchange rate reform promotes import of high quality input products by processing firms in China.I take the 2005 reform of exchange rate regime as a quasi experiment and the difference in import cost payment between two different kinds of processing firms can be utilized as an identification strategy,I find that as a response to the uncertainty shock brought by the reform,processing firm that import input by itself would import products of higher quality and export products of higher quality.