Appropriation Of Investments And Innovation Benefits In The U.S. - China Trade Relationship

It is widely understood that the 1978 market-oriented economic reforms set the stage for China’s phenomenal growth and swift accession to the world’s second-largest economy. A part of the reforms involved relaxing restrictions on foreign investment inflows, privatization and contracting of state-owned industries, and the lifting of protectionist policies. These initiatives are thought to have assisted the flow of knowledge and skills into China. Such flows are known to help deepen human capital which results in productivity increases when combined with improvements in physical capital and other resources. It is reasonable that these advantages are primarily channeled through international commerce linkages. This context provides for investment and innovation choices to influencing productivity outcomes among trading partners. This study presents an empirical framework for testing data from the U.S.-China trade experience for the period 1996-2014, with the aim of identifying how research and development (R&D) expenditures in the U.S. and China combine to influence productivity outcomes in the Chinese economy. The results indicate that R&D stock accumulation in the U.S. plays an important role in prompting productivity increases in China’s economy when combined with China’s own R&D efforts. The implications of the results can be applied in making strategic R&D choices that improve the advantages in the U.S.-China trade relationship