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Retrieved October 31, 2013 from http://repository.up.ac.za/handle/2263/31778 Zhe Y., Yunfei G., Maosheng L. (2010) The Research of Risk Management in Two Non-Independent IT System. Journal of Service Science and Management. Vol. 3, Iss. 2; pg. 181

BIOGRAPHY

Dr. Rell Snyder holds a DBA in Information Systems from Argosy University and is a Professor in the School of Engineering and Computing at National University.

GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 473 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1

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China’s swift rise from one of the poorest countries in the world to the second-largest economy is the subject of much discussion and inquiry across a broad dispersion that extends from the more absorbed academic and media spheres to the occasionally interested observer. There is an acceptance that the 1978 marketoriented economic reforms set the stage for China’s phenomenal growth. While the reforms were carried out in two phases, each with specific programs and timelines, this study’s inquiry mostly features the opening up of the country to foreign investment, privatization and contracting out of state-owned industry, and the lifting of protectionist policies, all of which have aided the flow of knowledge and skills into China.

Such flows have been known to help deepen human capital which results in productivity increases when combined with improvements in physical capital and resources. It is supposable that these advantages are primarily channeled through international commerce, with investment and innovation choices affecting the nature of productivity increases in close trading relationships. This paper is a preliminary empirical analysis of the U.S.-China trade experience with the aim of identifying how such choices by U.S. firms may be impacting innovation productivity increases in China.

JEL: F14; F20; F23 KEY WORDS: Trade, Technology Spillovers, Productivity, Foreign Direct Investment

INTRODUCTION

China’s swift rise from one of the poorest countries in the world to the second-largest economy is the subject of much discussion and inquiry across a broad dispersion that extends from the more absorbed academic and media spheres to the occasionally interested observer. There is an acceptance that the 1978 marketoriented economic reforms set the stage for China’s phenomenal growth. While the reforms were carried out in two phases, each with specific programs and timelines, much of our inquiry largely features the opening up of the country to foreign investment, privatization and contracting out of state-owned industry, and the lifting of protectionist policies, all of which have aided the flow of meaningful knowledge and skills into China. Several studies have demonstrated that such flows help deepen human capital which results in productivity increases when combined with improvements in physical capital and resources.

According to the new growth theory, increasing returns associated with new knowledge, ideas, and technology spillovers offer important insights in understanding gains in productivity (Romer 1986, Lucas 1988, Rebelo 1991). This study is premised on the idea that China’s market-oriented reforms paved the way for dissemination of knowledge, ideas and technology spillovers through trade and foreign direct investments (FDIs). Therefore, it can be taken that China’s accelerated growth is partly explained by these factors. A 1997 IMF study report by Zuliu and Moshin examined the sources of China’s growth and concluded that although important, the accumulation of physical capital and labor stock alone does not offer sufficient explanation. According to the study, during 1979-94 productivity gains accounted for more than 42 percent of China's growth and by the early 1990s had overtaken capital as the most significant source of that growth.

GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 474 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1 In the decades that followed the economic reforms of 1978, China has seen its FDI annual inflows increase from USD109 million in 1979 to USD13, 841 million in 2007. This amount constituted about half of all FDI inflows to all developing countries in the 1990s (Dmitrios K., Kostas V. et al,). The productivity advantages of multi-national enterprises (MNEs) over domestic firms are well documented (Blomstr¨om and Sj¨oholm, 1999; Markusen, 2002). An important argument presented by Helpman et al (2004) suggests that the high costs associated with FDIs in effect makes them a preserve of the most efficient firms.

Accordingly, there is a lot of potential for diffusion of knowledge from MNE affiliates to relatively backward local firms (Smeets and de Vaal, 2011).

This study sets to examine extent to which productivity increases in China can be explained by its trade with the U.S., by virtue of spillovers of technology and knowledge disseminated through R&D efforts by U.S. companies. The rest of the paper includes a review of literature, explanation of methodology, empirical analysis, discussion of results, and a statement of future research.

LITERATURE REVIEW

Connections between International Trade & Growth Early attempts at making connections between international trade and economic growth date back to 1776 when Adam Smith’s published his inquiry into the nature and causes of the wealth of nations. Several others who pursued this line of inquiry have helped improve our understanding of the role of international trade in spurring economic growth among nations using both classical approaches and more current adaptations.





In any case, there is a consensus that international trade and economic growth are two concepts that are paired together. It is not uncommon to find that entire economies are primarily sustained by their exports.

The oil rich Middle Eastern countries offer some appropriate examples. Clearly, economic growth has always been a central concern for governments, enterprises, and people in all nations. An argument can be made that international trade is the framework upon which economic wellbeing rests globally. The logical consequence is a movement towards more openness in trade across the globe.

As previously stated, the 1978 economic reforms in China amounted to more openness in trading internationally. Yao and Zhang (2003) cite the absorption of foreign capital as a respectable indicator of openness following the reforms. They point out that by 1995, only the U.S. surpassed China as the largest recipient of FDI. As global FDIs continue to grow in excess of both world output and world trade, China is by far the largest recipient having surpassed the U.S as host destination in 2004 (Shaukat and Wei, 2005).

China is also trading more than it has in past years. In 1978 prior to the economic reforms, China’s total imports ranked 32nd globally, accounting for a measly 1% of global trade compared to its present status as the world’s largest commodity exporter and importer since 2013 (Xiaojun).

Role of International Trade China’s Growth

According to an IMF study on how trading partnerships impact economic growth among partners, Arora and Vamvakidis (2004) found that United States is the most important trading partner for other countries.

This indeed is the case for China at this point in time. It is therefore conceivable that a significant level of China’s economic endowments from trade is likely from its trade with the United States and FDIs from U.S. firms. A large literature documents that trade and investment flows into less-advanced economies could bring about important technological spillovers that boost firm-level productivity and bolster their long-term economic prospects. Undoubtedly, there are cases when spillovers are confined among other multinationals, and in some cases end up crowding out domestic firms (Caves, 1996; De Backer and Sleuwaegen, 2003).

GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 475 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1 In China’s case, overall, existing literature seems to indicate mixed conclusions on the effects of FDI in particular, on domestic firms. While increases in productivity among Chinese firms since the economic reforms are undisputed, the mixed outcomes from previous studies suggest caution in attributing such increases to FDI inflows. For example, a study by Hale and Long (2007) failed to find any significant FDI spillover effects on productivity for domestic firms in the same upstream or downstream industries. They suggest that domestic firms may be assuming a more passive role in innovation, and focusing providing inputs and intermediate goods for multinational firms instead.

With respect to international trade, previous studies concur that it is a major channel of international technology spillovers. Coe and Helpman (1995) lend support to the idea of trade-related spillovers when they show that countries exhibit higher productivity levels as a result of importing goods from countries that are more technologically advanced. Acharya and Keller’s (2009) study offer other insights; they show that non-trade channels play a larger role for the U.S., Japan and Canada. Past limitations in appropriate comparative measures of openness (to trading internationally) have limited conclusions about the relationship between openness and productivity. However, there is a broad consensus on the productivity increases that are familiar to economies that trade more internationally. In China’s case, the combination of privatization and trade liberalization had strong effects on productivity growth in both the state and nonestate sectors, averaging 5.50 percent and 3.67 percent respectively from 1998 to 2007 (Zhu, 2012).

Productivity and Its Trade-Related Sources

It is taken for granted that capital intensity is one of the main determinants of productivity as measured by total factor productivity (TFP). Governments and organizations regularly device policies that encourage investments in capital because of their positive impact on TFP. Meanwhile, while any list of measurements of productivity can cover a substantial number of factors, it is important to recognize that no list can be exhaustive. Even so, the suitability of TFP measurement resides in its usefulness as a residual measure of changes in total output not accounted for by total factor input changes after the output of the weighted sum of all inputs have been determined. In addition (assuming combination with a fixed factor), TFP measurement is not subject to diminishing returns, unlike increments of capital and labor. The implication is that any residual increases in output that are not accounted for by total factor input changes after the weighted sum of all inputs has been determined can be thought of as an outcome of innovativeness and technological advancements (Mutsune, 2010).

In effect, the connections between TFP and innovativeness reiterate the conclusions by Zuliu and Moshin (1997); the accumulation of physical capital and labor stock alone do not fully account for growth increases in China. Several studies have concluded that most differences in output among countries are attributed to TFP (Porter, 1990; Ezeala-Harrison, 1995; Krugman, 1996; Aiyar and Dalgaard, 2004). According to a United Nations Industrial Development Organization (UNIDO) study by Anders Isaksson (2007), knowledge has a direct effect on TFP. Even with factor inputs, one still needs to possess knowledge on how best to organize factor input combinations for optimum production. Superior knowledge allows for optimum organization of inputs. It is also understood that knowledge tends to be regenerative; it combines in new and dynamic ways that can amount to innovation. However, several studies have also pointed out that, the link between TFP and knowledge is considerably weakened by factors such as institutional quality, degree of openness and flexibility of the economy, government policy actions, and financial infrastructure among several others.

The Role of Technology and Knowledge Transfers A 2010 China Business Review article by Jarret and Wenthold on technology transfers to Chinese firms discloses that technology transfer has been a focus of China’s growth plans for decades. This focus became GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 476 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1 prominent when former leader Deng Xiaoping, inspired by the advanced technology he witnessed during trips abroad, enacted policies in the 1980s that allowed foreign firms to access China’s market in exchange for advanced technology. They add that Chinese companies have benefited from advanced technologies with relatively little capital expenditure, which expedites the process of achieving organic growth.

However, a 2015 Congressional Research Report by Wayne Morrison, expressed concerns about the policies arguing that they are constitute pressure by government entities to transfer technology to a local partner as a part of the cost of doing business in China, and are also contradict China’s obligations to the WTO.

Other channels for knowledge transfers into China are less contentious. For example, in a move aimed at promoting technical improvements in local companies, especially innovation of small and medium-sized enterprises, Chinese authorities have outlined policies that use tax breaks to encourage local enterprises to upgrade their equipment and increase research and R&D efforts to improve the manufacturing industry.

The arrangement particularly favors an array of high-tech equipment and product imports that are intermediate in the manufacture of IT products and software. According to a 2014 OECD Science, Technology and Industry Outlook Report, China already spends a lot more on R&D than Japan, and is poised to overtake the EU and also surpass the United States by 2019.



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