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Did US Multinationals Transfer Too Much Technology to China?

By Jaedo Choi and Yongseok Shin

“In this game, one American company gets to win. They don’t care if all their US competitors lose. It’s actually better for them. But on the other side, all the Chinese companies win. They all get to step up and create a massive market where none previously existed.” McGee (2025, p.288)

China’s Quid Pro Quo policy, which has mandated foreign multinationals to form joint ventures as a way to promote technology transfers into China, has long been at the center of the US-China economic rivalry. Because joint venture ownership is split between local Chinese firms and foreign multinationals, Chinese partners engage in management and decision-making, which can facilitate technology transfers more effectively than other forms of foreign direct investment (FDI). Although China has not explicitly mandated joint ventures since joining the WTO in 2001, multinationals continued to face implicit pressure. As some executives put it, “voluntary is the new mandatory” (McGee, 2025). Amid rising economic rivalry, the US has imposed restrictions on outward FDI into China in high-tech industries. The CHIPS and Science Act of 2022 is one example.

However, US firms voluntarily entered into joint ventures to access China’s large market and low wages, despite the risks of technology leakage. Is there still an economic justification for restricting joint ventures? If so, did US firms indeed transfer too much technology to China through joint ventures?

In our new research (Choi et al., 2025), we answer these questions. The key issue is that US multinationals do not care about (or internalize) the negative impacts of their JV decisions on other US firms. From the perspective of individual firms, establishing joint ventures is profitable, as they gain access to the Chinese market and lower wages. However, by transferring technology through joint ventures, they make their Chinese partners more productive, and through diffusion, indirectly benefit other Chinese firms. Over time, global competition intensifies, hurting other US firms. Therefore, there could be over-investment in joint ventures relative to the US social optimum. 

Three Empirical Findings: Joint Ventures Appear to Generate Direct and Indirect Benefits for Chinese firms, but Negative Consequences for US Firms

We combine multiple micro datasets containing firm-level balance sheet and patent information for both US and Chinese firms. Our analysis provides three key findings:

  1. Direct effects for Chinese partner firms: Chinese firms that formed joint ventures with foreign multinationals experienced faster growth and their patenting activities became more similar to their foreign multinational partners, suggestive of direct technology diffusion.
  2. Indirect effects for other Chinese firms: In industries with more FDI into China, even Chinese firms that were not directly involved in joint ventures grew faster and technologically more advanced.
  3. Negative US outcomes: In these industries with more FDI, US firms experienced more negative outcomes in terms of size and innovation.

Higher US welfare and more US innovation when restricting joint ventures in 1999

Using a quantitative two-country open economy growth model with endogenous joint venture and innovation decisions, we evaluate the welfare effects of restricting joint ventures starting in 1999. The key trade-off of US firms’ joint venture decisions is gaining access to larger market and low wages on the one hand, and the risk of technology leakage on the other. This leakage makes Chinese firms, both joint venture partners and other firms, more productive, which we refer to as the leakage effect. The model is calibrated to our micro-level empirical facts 1, 2, and 3 above.

Figure 1: Average Productivity Ratio between the US and China. Baseline vs. Restricting Joint Venture in 1999

We find that shutting down joint ventures slows China’s catch-up with US (Figure 1), which in turn improves US welfare by 1.2%. Figure 2 illustrates consumption path when joint ventures are shut down, compared to the baseline with joint ventures. In the short run, consumption declines because US firms lose profits due to reduced access to Chinese market and cheap labor. Over time, however, consumption begins to rise as the long-run benefits of limiting technology leakage outweigh the short-run costs.

Figure 2: Relative Consumption over Time. Baseline vs. Restricting Joint Venture in 1999


One of the long-run drivers of higher consumption is an increase in US innovation. When joint ventures are restricted, US innovation rises, as shown in Figure 3, which reports the difference in innovation rates between the counterfactual and the baseline. Joint ventures have two opposing effects on US innovation. On the one hand, a higher risk of technology leakage to China reduces the payoff from successful innovation; this discourages innovation. On the other hand, the option to form joint ventures can stimulate innovation, because of larger market size and an increase in the bargaining fees US firms receive from their Chinese partners. Our model shows that, in the long run, the negative leakage effect dominates, so restricting joint ventures ultimately boosts US innovation.

This innovation result is consistent with the observation made by Andy Grove, a former CEO of Intel: “Our pursuit of our individual businesses … often involves transferring manufacturing and a great deal of engineering out of the country … We don’t just lose jobs—we lose our hold on new technologies and ultimately damage our capacity to innovate” (Bloomberg, 2010).

Shutting down all joint ventures is not an optimal policy. Targeting restrictions only to industries with large technology gaps between the US and China result in greater US welfare gains, because these industries are most vulnerable to the leakage effect. However, this state-dependent policy reduces US innovation by reducing firms’ incentives to maintain large technology leads over Chinese firms.  

Figure 3: Differences in US Innovation Rates over Time. Baseline vs. Restricting Joint Venture in 1999


Coordinating joint ventures improves US welfare

From the US perspective, coordinating JVs can improve US welfare, while preserving gains from joint ventures. We consider an alternative scenario in which US firms are required to compensate other domestic firms’ profit losses caused by their joint venture activities. In this scenario, fewer joint ventures are established, and shutting down joint ventures reduces US welfare, because the technology leakage effect is internalized.

Timing matters: US welfare decreases when restricting joint ventures in 2025

However, shutting down joint ventures does not always improve US welfare. We consider shutting down joint ventures in 2025, instead of 1999, in light of more recent policy debates. In contrast to the 1999 case, restricting joint ventures in 2025 reduces US welfare by 0.7%, rather than raising it. By 2025, the US-China technology gap became much smaller, so technology diffusion and the resulting leakage effects on other domestic firms has become weaker. Although the restriction still slightly widens the US-China productivity gap, the loss of forgone JV profits and market access outweigh the modest gains from reduced technology diffusion.

Policy implications

As technology rivalry between the US and China deepens, our findings have important implications.

  1. There is potential over-investment in joint ventures because multinationals do not take other firms’ profit losses into account.
  2. Technology leakage from joint ventures may undermine US innovation.
  3. Shutting down all joint ventures may not be optimal; restricting them only in industries with large technology gaps between the US and China leads to greater US welfare improvements.
  4. Shutting down joint ventures does not always improve US welfare; the outcome depends on the technology gap between the US and China.

This article is based on the paper, “The Dynamics of Technology Transfer: Multinational Investment in China and Rising Global Competition, EMPCT Working Paper 2025-07

Note: The views expressed herein are our own and do not represent the views of the Federal Reserve Bank of St. Louis, the IMF, its Executive Board, or its management. They also do not necessarily represent the views of the University of Texas at Austin.

Reference
Choi, Jaedo, George Cui, Younghun Shim, and Yongseok Shin. 2025. “The Dynamics of Technology Transfer: Multinational Investment in China and Rising Global Competition.” EMPCT Working Paper 2025-07

Grove, Andy. 2010. “How America Can Create Jobs.” Bloomberg, July 1. https://www.bloomberg.com/news/articles/2010-07-01/andy-grove-how-america-can-create-jobs

McGee, Patrick. 2025. Apple in China: The Capture of the World’s Greatest Company.