Technology Transfer and Countercyclical Regulatory Policy

Will technology transfer to China turn out to be a bad deal for some U.S., Japan, and European companies? Today’s article in the WSJ on high-speed rail raises some interesting questions.

QINGDAO, China—When the Japanese and European companies that pioneered high-speed rail agreed to build trains for China, they thought they’d be getting access to a booming new market, billions of dollars worth of contracts and the cachet of creating the most ambitious rapid rail system in history.

What they didn’t count on was having to compete with Chinese firms who adapted their technology and turned it against them just a few years later.

This is a very important story. The economics of technology transfer, in my opinion, is the hidden engine for the global economy.  When technology–knowledge capital–is transferred by a U.S., European, or Japanese company to a lower-cost Chinese supplier, what happens? The immediate effect:  China  becomes more productive and richer by the value of that knowledge capital. This is to China’s credit, incidentally, since absorbing technology transfers is not an easy task. (I plan to do an estimate of the size of the technology transfer pretty soon).

You can think of the technology transfer as implicit payment for cheap imports. U.S, European, and Japanese companies transfer knowledge capital to Chinese suppliers, and get back low-cost goods and services in return.

But to make technology transfer a win-win game for everyone in the long-term,  three things have to happen next. First,  Chinese firms must  improve on the transferred technology,  in order to  boost productivity globally.

Second, U.S., European, and Japanese firms must  switch some of their resources from production to research, development, and design, and create the next generation of innovative products.  That’s the Apple strategy, and it’s worked well for them.

Third,  U.S., Japanese, and European firms must slow down the rate of technology transfer, especially on cutting-edge technologies and key technologies for the defense industrial base. Successful innovation is risky business, and shouldn’t be given away so easily.

How can government help? That’s where countercyclical regulatory policy comes in. The U.S. is at a crossroads right now. The job market is weak and innovation is lagging. At this crucial moment,  we should be doing everything we can to encourage the domestic sectors that are already innovating and growing. That includes communications, biosciences, and higher education.

Encouraging innovation and growth, however, does not translate into “adding more regulations.”  In this downturn, Congress and the Obama Administration must show that they actually are willing to put jobs and innovation first over short-term regulatory objectives.  That’s the way we can both create jobs in the short-run and find a long-term path for the future.



  1. Third, U.S., Japanese, and European firms must slow down the rate of technology transfer, especially on cutting-edge technologies and key technologies for the defense industrial base. Successful innovation is risky business, and shouldn’t be given away so easily.

    I’m not sure how you would do that, without legislation outright banning the export of certain technologies and the like (which we get with various forms of defense technology). As the article says, much of the tech transfer has come from companies voluntarily giving up their technology in exchange for the right to actually set up in China.

  2. This is the fundamental problem. The US (or any of the advanced developed economies) have been too eager to hand over technology to the developing countries. This technology was hard-earned, developed at great cost. Companies liek GE just handed it over. And not only did they hand over the technology, they paid for the training of the people, and all of the production equipment and facilities. I well remember the PBS documentary on Newell Rubbermaid, who closed down their production facilities in the US, and as they sold their production equipment, lo and behold there was the Chinese supplier queued up to buy the equipment at pennies on the dollar. For many of these companies, they believed two things (i) the lower cost products (still sold at the same price, hence massive margin improvement) and (ii) that they’d get access to those developing markets and many more consumers. Problem is, the second never happened, because the developing countries forced them to partner with their own local businesses and transfer the technology, and then gave all the business to the local businesses who they’d teed up nicely, and restricted access to their internal market to US businesses. As for what happens now… its already too late, the genie can’t be put back in the bottle. Already a large part of R&D is being done in the developing world, they already have taken our ideas and expanded on them and are innovating faster than we are. We can’t compete because we don’t know how the products are made, we have neither the skilled labor nor the production equipment to do it, and we certainly are not capable of developing sufficiently advanced equipment to completely eliminate the labor. We have no technologists or engineers left because none of the kids want to do that work, its been that way for 2 generations or more. China and India continue to churn out engineers from their universities; in fact, they’ve now got an excess of them, which will bring down costs since supply exceeds demand.

  3. Oh and BTW, this already happened once before to the US with Japan. Think the Japanese invented their quality and production methods themselves? Think again. It was handed to them on a plate by Deming and others. What they did was do it on an industrial scale and on everything they did with discipline, whereas in the US, the very ideas developed here were not adopted here, because the US is ill-disciplined if very creative, and obsessed with money (the end result and not themeans to the result).


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