Staff Report 486

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Quid Pro Quo: Technology Capital Transfers for Market Access in China

Thomas J. Holmes - Consultant
Ellen R. McGrattan - Consultant
Edward C. Prescott - Senior Monetary Advisor

Revised October 28, 2013

Abstract
Despite the recent rapid development and greater openness of China’s economy, FDI flows between China and technologically advanced countries are relatively small in both directions. We assess global capital flows in light of China’s quid pro quo policy of exchanging market access for transfers of technology capital—accumulated know-how such as research and development (R&D) that can be used in multiple production locations. We first provide empirical evidence of this policy and then incorporate it into a multicountry dynamic general equilibrium model. This extension leads to a significantly better fit of the model to data. We also find large welfare gains for China—and welfare losses for its FDI partners—from quid pro quo.

RELATED PAPERS: Staff Report 487 Technical Appendix for Quid Pro Quo: Technology Capital Transfers for Market Access in China, Staff Report 488 Patent Data Appendix for Quid Pro Quo: Technology Capital Transfers for Market Access in China, Staff Report 396 Openness, Technology Capital, and Development, and Staff Report 406 Technology Capital and the U.S. Current Account


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