The State As a Mediator and Disabler: Economic Openness, Technological Catching-up, and Indigenous Innovation in Chinese Firms

Technological innovation has been widely acknowledged as a key element of productivity growth and especially a major driver of industrialization in developing countries. The recent global integration of capital and technology generates a pressing debate on whether and how technologically backward countries can benefit from Foreign Direct Investment (FDI) and catch up technologically. The recent scholarship has advanced two major arguments: First, the effectiveness of FDI-led technology transfer is neither context-free nor unconditional. Second, only when gaining sufficient “absorptive capacity” can local firms enhance their indigenous innovation. However, knowledge of the mechanisms accounting for the effective interactions between domestic innovative infrastructure, FDI-induced technology transfer, and local firms is limited. In this study, I introduce the state as one central explanatory variable and distinguish two types of the state’s roles in transmitting foreign technology to local firms’ innovativeness: 1) the state’s mediating effect that constitutes the FDI-firm linkage; and 2) the state’s intervention effect that shapes firm governance and thus affects firm innovativeness. I test both effects combined with FDI spillovers and local firms’ absorptive capacity in a national dataset of Chinese firms. Building on my data analysis, I find that the state’s mediating effect enhances the efficacy of the FDI-firm linkage and thus improves local firms’ indigenous innovativeness, but the state’s intervention into firm governance negatively affects firm innovativeness.

This study contributes to two core theoretical approaches in the literatures of “developmental” states specifically and economic sociology more generally. First, as Evans (1995) suggests, the developmental states must maintain certain degree of “autonomy” while “embedding” themselves in the connections with both the economy and the civil society, so that they can avoid the apprehension of state privileges by private groups and/or political elites. My firm-level evidence demonstrates exactly where such “autonomy” of the state from the economic organizations is missing in the Chinese context and what consequences result from the state’s over-intruding behaviors. Second, one central subject in the economic sociology is to study the mutually constitutive relationship between the state and the economy and especially the critical role of the state in a variety of economic institutions and organizations. In looking at one significant economic activity – FDI-induced technology transfer and innovations, this study identifies specific mechanisms through which the state enables, promotes, mediates, and under some circumstances weakens or disables the channels between FDI-induced technology transfer and local firms’ indigenous innovativeness. For technologically lagging countries, having supportive policies formulated at the macroeconomic level is helpful but certainly not sufficient. In promoting a country’s technological level and perhaps economic growth in general, the state should be willing to act as a good enabler or mediator and at the same time know exactly when and where it should shy away.