Can Technology Transfers Save Innovation? Evidence from China

This paper examines the impact of technology transfers on long-term innovation. We propose an extended Schumpeterian growth framework to characterize the channels by which technology transfers impact on innovation. Exploiting variations in the adoption of Soviet-aided industrialization programs across Chinese cities, we find that firms located in cities affected by 156 major industrial projects of the Soviet Union witness fewer Investments in research and development on average after nearly half a century. The effect is particularly pronounced for non-state-owned firms. The decline in innovation inputs is further supported by a lower probability of patenting in these localities. A likely underlying mechanism is the low adoption of performance-based reward systems that influence labor reallocation within firms, rather than inadequate capital and skilled workers. Despite prior successes during the planned economy era, the adoption of such foreign aid tends to impede innovation as China transitions towards a more market-oriented economy.