Machines Could Not Compete with Chinese Labor: Evidence from U.S. Firms’ Innovation

116 Pages Posted: 2 Jun 2015 Last revised: 18 Oct 2023

See all articles by Jan Bena

Jan Bena

University of British Columbia - Sauder School of Business

Elena Simintzi

Centre for Economic Policy Research (CEPR); University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Date Written: October 17, 2023

Abstract

We study how multinational firms' ability to lower the cost of production through access to offshore labor affects their decisions to develop new production technologies. We use the 1999 U.S.-China bilateral agreement, which led to an improvement in contracting institutions in China and reduced uncertainty for U.S. multinationals, allowing them to source labor cheaply through FDI. Using subsidiary-level data from China matched to U.S. parent companies, we show that U.S. firms scale up their Chinese operations following the agreement, as compared to other foreign subsidiaries, and their subsidiaries become more profitable. We create a novel measure of innovation and show that U.S. multinationals with subsidiaries in China decrease their process innovations---innovations that improve firms' own production methods---following the agreement. These findings suggest that firms' ability to source labor cheaply across borders affects the development of technologies at home, highlighting that production and technological choices are jointly determined.

Keywords: process innovation, technological change, labor, China

JEL Classification: O33, J31, L23

Suggested Citation

Bena, Jan and Simintzi, Elena, Machines Could Not Compete with Chinese Labor: Evidence from U.S. Firms’ Innovation (October 17, 2023). Available at SSRN: https://ssrn.com/abstract=2613248 or http://dx.doi.org/10.2139/ssrn.2613248

Jan Bena

University of British Columbia - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
+1 604 822 8490 (Phone)

HOME PAGE: http://www.janbena.com

Elena Simintzi (Contact Author)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,662
Abstract Views
8,929
Rank
20,650
PlumX Metrics