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News : Innovation Last Updated: Jun 28, 2011 - 12:00 PM

Foreign multinationals in China: Faustian bargain to trade technology for access?
By Finfacts Team
Apr 1, 2011 - 5:39 AM

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China's Overseas Direct Investment, from US-China Economic and Security Review Commission report Going Out: An Overview of China’s Outward Foreign Direct Investment (pdf).

As China promotes policies to develop its own research and development competence, there is an ongoing debate on whether the demands that are set for entry to the potentially huge market is effectively a Faustian bargain with the devil, where foreign multinationals trade technology for access.

In testimony this week before the US-China Economic and Security Review Commission, a body established by the US Congress to monitor the bilateral trade relationship, Dr. Theodore H. Moran, Marcus Wallenberg chair in International Business and Finance, School of Foreign Service, Georgetown University, Washington, DC and a fellow at the Peterson Institute for International Economics, quoted Steven Pearlstein, business columnist of The Washington Post: "China can strike deals that may provide short-term profits to one company and its shareholders but in the long run undermine the competitiveness of the other country's economy."

However, Prof. Moran said that what is striking in the aggregate data is how relatively thin the layer of horizontal and vertical spillovers from foreign manufacturing multinationals to indigenous Chinese firms - - and consequent export externalities - - has proven to be.

He says "the share of domestic value-added in FDI operations in China in high-skill-intensive sectors such as computers and telecommunications ranges from less than one-half to slightly more than one-half of what is found in other developing countries where comparable measurements can be made, such as Mexico."

Prof. Moran adds: "China has remained a low value-added assembler of more sophisticated inputs imported from abroad - - a 'workbench' economy largely bereft of the magnified benefits and externalities from FDI enjoyed by other developing countries."

He remarks how home-based MNCs from developed countries have remained despite globalization and cites the United States where the most recent data shows that US-headquartered MNCs have 70% of their operations, make 89% of their purchases, spend 87% of their R&D dollars, and locate more than half of their workforce within the US economy. "This predominant focus on the home economy has persisted over time, and changes only very, very slowly at the margin," he says.

Finfacts article, Feb 2011: China’s drive for ‘Indigenous Innovation' and foreign multinationals

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