August 22, 2025, Filed Under: Working PaperThe Dynamics of Technology Transfer: Multinational Investment in China and Rising Global Competition EMPCT Working Paper Series No. 2025-0776 pages | PDF Download | PDF in Browser Citation: Choi, Jaedo; Cui, George; Shim, Younghun; and Shin, Yongseok, “The Dynamics of Technology Transfer: Multinational Investment in China and Rising Global Competition”, June 2025 Jaedo ChoiFederal Reserve Board George CuiInternational Monetary Fund Younghun ShimInternational Monetary Fund Yongseok ShinWashington University in St. LouisFederal Reserve Bank of St. Louis AbstractUS multinationals form joint ventures in China for market access and lower labor costs. However,these ventures transfer knowledge to Chinese partners and local firms, increasing futurecompetition from China. While multinationals take into account these spillovers, they don’t accountfor the impact on other US firms, potentially leading to over-investment from a US socialperspective. We establish three novel empirical facts on spillovers and competition effects. First,Chinese parent firms of joint ventures become larger, export more, and grow technologically similarto their US partners. Second, in industries with more joint ventures, even non-participatingChinese firms grow larger and more technologically advanced. Third, US firms in these industriesexperience negative impacts on their size, exports, and innovation. We then develop a two-countrygrowth model with oligopolistic competition and endogenous innovation and joint venture decisions.For the US, joint ventures generate short-run gains that are outweighed by long-run lossesdue to rising competition from China. Large US firms’ profits are higher with joint ventures, atthe expense of small firms’ profits and the real wage. Banning joint ventures from the beginningwould have raised US welfare by 1.2 percent but reduced China’s by 10.6 percent, as Chinese firms’productivity growth is substantially delayed.
