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Quid Pro Quo, Knowledge Spillovers, and Industrial Quality Upgrading: Evidence from the Chinese Auto Industry

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  • Barwick, Panle
  • Bai, Jie
  • Cao, Shengmao
  • Li, Shanjun

Abstract

This paper studies the impact of FDI via quid pro quo (technology for market access) in facilitating knowledge spillovers and quality upgrading. Our context is the Chinese automobile industry, where foreign automakers are required to set up joint ventures (JVs) with domestic automakers to facilitate technology transfers in return for market access. Our identification strategy exploits a unique dataset of detailed vehicle quality measures and relies on within-product variation across quality dimensions. We show that affiliated domestic automakers tend to adopt the quality strengths of their JV partners, consistent with knowledge spillovers. We rule out alternative explanations, such as endogenous JV formation, geographic proximity, overlapping customer bases, brand image association, and patent transfers. Additional analysis suggests that worker flows and supplier networks mediate knowledge spillovers. Overall, knowledge spillovers due to ownership affiliation under quid pro quo contributed 8.3% of the quality improvement experienced by affiliated domestic models between 2001 and 2014, relative to nonaffiliated domestic models.

Suggested Citation

  • Barwick, Panle & Bai, Jie & Cao, Shengmao & Li, Shanjun, 2024. "Quid Pro Quo, Knowledge Spillovers, and Industrial Quality Upgrading: Evidence from the Chinese Auto Industry," CEPR Discussion Papers 19440, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19440
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    2. Chiappinelli, Olga & Giuffrida, Leonardo M. & Spagnolo, Giancarlo, 2025. "Public procurement as an innovation policy: Where do we stand?," International Journal of Industrial Organization, Elsevier, vol. 100(C).
    3. Wu, Jingwen & Zhang, Tong & Liao, Hua, 2024. "Fuel economy standards: Regulatory loopholes and firms’ heterogeneous responses," Journal of Environmental Economics and Management, Elsevier, vol. 123(C).
    4. Shanjun Li & Xianglei Zhu & Yiding Ma & Fan Zhang & Hui Zhou, 2022. "The Role of Government in the Market for Electric Vehicles: Evidence from China," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 41(2), pages 450-485, March.
    5. Chen, Zhou & Chen, Zhao, 2025. "Ambitious energy density requirements hinder progress: Unintended effects of new energy vehicle subsidies on battery," Energy Economics, Elsevier, vol. 144(C).
    6. Haiwei Jiang & Yousha Liang & Shiyuan Pan, 2022. "Foreign direct investment and regional innovation: Evidence from China," The World Economy, Wiley Blackwell, vol. 45(6), pages 1876-1909, June.
    7. Nam, Jaejun & Kim, Nayeon, 2025. "Limits of Knowledge Spillovers: Why Developing Economies Struggle to Catch Up," MPRA Paper 126362, University Library of Munich, Germany.
    8. Branstetter, Lee G. & Li, Guangwei & Ren, Mengjia, 2023. "Picking winners? Government subsidies and firm productivity in China," Journal of Comparative Economics, Elsevier, vol. 51(4), pages 1186-1199.
    9. Xiaodong Zhu, 2024. "China's Productivity Challenge," Working Papers tecipa-771, University of Toronto, Department of Economics.
    10. Ma, Xiao & Zhang, Yiran, 2023. "How do Multinational Firms Impact China’s Technology? The Role of Quid Pro Quo Policy and Technology Spillovers," MPRA Paper 119371, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O25 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Industrial Policy

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