Can Technology Transfers Save Innovation? Evidence from China

Abstract

This paper examines the causal impact of technology transfers on long-run innovation inputs by exploiting variations in the adoption of Soviet-aided industrialization programs across Chinese cities. Focusing on 156 major industrial projects aided by the Soviet Union, I find that adopting these programs substantially reduces local industrial firms’ investments in research and development after nearly half a century, particularly for non-state-owned firms. The decline in innovation inputs is further supported by firms’ lower probability of patenting in adopting localities. Low adoption of performance-based reward systems, rather than inadequate capital and skilled workers, is a likely underlying mechanism. Despite prior successes achieved in the era of planned-oriented economy, the adoption of such foreign aid tends to impede innovation with China’s transition toward a more market-oriented economy.