The Costs of Quid Pro Quo

To gain access to its markets, the Chinese government sometimes requires high-technology foreign firms to transfer partial property rights to their technology. Because the Chinese market is large and potentially lucrative, major multinationals typically agree to this quid pro quo policy, often through joint ventures with Chinese firms. We use a quantitative macroeconomic model to analyze the effects of this policy on firm investment incentives, Chinese technology goals, and overall international technology and investment flows. We find that: ?China has a very strong incentive to use the policy and would continue to use it even if advanced countries imposed identical policy restrictions on access to their domestic markets. ?The policy discourages innovation investment by foreign firms. We estimate that, by 2010, China?s quid pro quo had reduced advanced country stocks of knowledge by about 5 percent relative to what they would have been had China not imposed the policy. China?s economy is thus big enough that its policies have global consequences for investment and growth. ?Despite this disincentive, direct investment into China by advanced country firms does take place, and the resulting technology transfers accumulate in China. We estimate that as of 2010, more than half of all technology owned by Chinese firms was obtained from foreign firms. At this point, U.S. policy options on China?s quid pro quo requirement are limited and possibly counterproductive. Nonetheless, as China?s technology advances, the incentives underlying its policy may change and it will have greater motivation to protect its own technology property rights, and respect others?.