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Machines could not compete with Chinese labor: evidence from US firms’ innovation

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  • Jan Bena
  • Elena Simintzi

Abstract

We study how multinational firms’ access to offshore labor affects their decisions to develop new production technologies. The 1999 US–China bilateral agreement improved contracting institutions in China, reducing uncertainty for US multinationals and enabling cheaper labor sourcing through foreign direct investment. Using data from US parent companies and their Chinese subsidiaries, we show that US firms expanded their Chinese operations and increased subsidiaries’ profitability post-agreement. Our novel measure reveals that US multinationals reduced process innovations after the agreement. These findings highlight the impact of cross-border labor sourcing on domestic technological development, highlighting that production and technological choices of multinationals are jointly determined.

Suggested Citation

  • Jan Bena & Elena Simintzi, 2025. "Machines could not compete with Chinese labor: evidence from US firms’ innovation," Review of Finance, European Finance Association, vol. 29(6), pages 1619-1661.
    • Handle: RePEc:oup:revfin:v:29:y:2025:i:6:p:1619-1661.
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    File URL: http://hdl.handle.net/10.1093/rof/rfaf040
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    Keywords

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    JEL classification:

    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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