How do Multinational Firms Impact China’s Technology? The Role of Quid Pro Quo Policy and Technology Spillovers

Multinationals play a crucial role in international knowledge diffusion. Given the recent concern that multinationals are departing China, understanding the importance of multinationals for China's technology is also particularly policy-relevant. Using comprehensive patent data from China, we document: (1) multinational affiliates and their foreign parent firms comprise a significant portion of patents filed with China’s patent office; and (2) there are subsequent transfers and spillovers of these technologies to domestic firms. Guided by the empirical findings, we develop a quantitative framework of multinational activities featuring cross-country technology flows, transfers, and spillovers. Quantitatively, we find that without multinational production and knowledge spillovers, China's total technology capital would drop by 36%. Furthermore, due to the externalities of multinationals’ technology investments, subsidizing multinationals in China will be socially beneficial, and reduced knowledge transfers/spillovers largely amplify the negative effects of multinationals' departing China on both China's GDP and technology.