Abstract: Most of processing exporters in China are foreign affiliates. By introducing the upgrading decision into the existing heterogeneous firms’ trade model, we illustrate how the heterogeneous foreign-invested firms make the technology adopting choices. The model shows that excessive variable costs subsidy may depress the upgrading incentive of inefficient firms, but proper R&D subsidy can promote the upgrading of foreign affiliates. Then we make use of the Chinese manufacturing firm-level data to test the main predictions of the theoretical model. We find that efficient foreign firms hire more high-skilled employees and pay more R&D expenses relative to the less efficient foreign firms. The highly export intensive firms, processing firms and firms that invest in the labor-intensive sectors are less efficient among foreign firms even if the capital-labor ratio has been controlled. The model implies that the government should tighten the excessive export-promoting policy in ways of variable cost subsidy reductions, subsidize properly the R&D activities of the low technology foreign firms, cultivate high-quality human resources to attract the R&D centers of multinational corporations and assist transition of foreign-invested exporters.
Keywords: Trade Cost, Technology Adoption, Foreign-Invested Exporters, Heterogeneity
source:Finance & Trade Economics ,No7,2013