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EU – China Technology Transfer: A Survey of Issues

Kirit Vaidya, David Bennett and Xiaming Liu

EU – China Technology Transfer: A Survey of Issues 1

Kirit Vaidya, David Bennett (Aston Business School) and Xiaming Liu (Birkbeck College,
University of London)


This paper assesses the contribution of international technology transfer to the

development of China’s technological capability. It is based on studies of (a) the
motivations of European businesses transferring technology to China and (b) an
assessment of China’s revealed comparative advantage in selected sectors. The
dominant initial motivation of European firms in transferring technology is market
access but for a large proportion of them there are also other strategic considerations -
use of China as a production base and reacting to competitors’ moves. Continued
innovation, protection of the core proprietary knowledge and collaborative ventures in
China is the combination of strategies of these firms in response to the risk of loss of
competitive advantage as a consequence of technology transfer. The comparative
advantage analysis shows that China’s competitiveness is mainly in low-tech labour-
intensive products but the country is gaining comparative advantage in a selection of
medium-tech sectors (e.g. consumer electronics) and in the high-tech product groups,
telecommunications and automatic data processing equipment. This is largely following
the path of earlier latecomer industrialisers of East Asia. FDI and related technology
transfer, leveraged through market access, and the emergence of new firms, especially
in the telecommunications and electronics sectors have been crucial in developing
capabilities and competitiveness.

China has become something of a model for industrial and economic development since the
initiation of the “open door” policy for trade and investment in December 1978. The country‟s
economic growth has been in the 7 to 10 per cent per annum range since the early 1980s
leading to an increase of 350 per cent in GDP per capita between 1980 and 1999. Foreign
trade has grown in absolute terms and as a proportion of both GDP and world exports.
Whereas in 1980 exports amounted to only 6 per cent of GDP, by 2002 the figure was 22 per
cent. China‟s share of world exports has grown from 0.9 per cent in 1980 to 7 per cent in 2002
and China has become one of the world‟s largest recipients of foreign direct investment (FDI).
Between 1985 and 2002 total realised FDI amounted to US$ 444 billion and between 1993
and 2000, it accounted for almost 14 per cent of total fixed investment in the economy (Wei
and Liu 2001,

Please address correspondence to Kirit Vaidya, Aston University, Birmingham B4 7ET,
United Kingdom, email:, Tel: +44 (0)121 359 3611, Mobile: +44
(0)7712 583524, Fax: +44 (0)121 333 3474.

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

Economic liberalisation in general, and especially the establishment of Special Economic

Zones, enabled China to take advantage of its low-cost labour factor endowment in line with
the Heckscher-Ohlin comparative advantage theory (Yeats, 1989, 1992). The result was fast
growth of exports of low-tech labour–intensive products (Chan et al, 1999). The importance of
foreign invested enterprises as exporters also increased as foreign firms took advantage of
favourable cost and policy conditions. The proportion of Chinese exports of manufactures
from foreign invested firms grew from 12.5 per cent in 1990 to 31.5 per cent in 1995 and 48
per cent in 2000 (Wei and Liu 2001,

During the 1980s, mainland China “captured” export growth in the textile and clothing sectors
from Hong Kong, South Korea and Taiwan, as their labour costs increased and they developed
comparative advantage in more technologically advanced industries (Yang and Zhong, 1996).
As the Chinese economy has developed, the expectation is that there will have been a gradual
movement towards more capital and technology intensive exports in line with the stages theory
of comparative advantage as factor endowments change with the development of more
advanced skills and capabilities over time and the cost of labour goes up with the success of
the labour-intensive stage (World Bank, 1993).

A major aim of China‟s science and technology (henceforth S&T) policies has been to buck the
stages model and shift rapidly from labour-intensive, low-tech production and exports to more
advanced technology sectors. Until the early 1980s, China‟s S&T development relied primarily
on state owned research and development organisations operating under tight government
controls. The S&T policy initiatives such as the 863 Plan and the Torch Plan in the 1980s
attempted to (a) revitalise scientific research institutions, (b) direct them to generate
technologies which could be applied commercially, and (c) create better linkages between S&T
institutions and state enterprises (Simon and Rehn, 1988; Simon and Goldman, 1989; Wang,
1993). Later policies initiatives made higher S&T expenditure commitments, put the onus for
developing capability on firms, recognise the role of foreign enterprises as providers of
technology and support start-ups of high-tech firms (Suttmeier, 1995; Ministry of Science &
Technology, 1997; State Economic and Trade Commission, 2002).

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

Increased international technology transfer was expected to play an important role in

upgrading Chinese technological capability. Until the late 1970s the bulk of technology imports
were in the form of complete sets of equipment or turnkey plants in the petrochemical, steel,
electricity generation equipment and mining machinery industries. The turnkey projects were
expensive and the potential for developing Chinese technological capability based on these was
limited (Bennett et al, 1997a). From the 1980s, government policy encouraged technology
transfer through all modes and expected FDI, especially in joint ventures, as the most
important mode of technology transfer. FDI was encouraged by tax incentives which were
especially favourable for foreign-invested firms operating in China‟s SEZs and other areas
designated for special treatment.

The aim of Chinese policy appears to be to speed up the acquisition of capabilities and
competitive advantage in advanced technology sectors by complementing domestic S&T
development with international technology transfer. This paper explores the contribution of
international, and especially European, technology transfer to the development of Chinese
technological capabilities and competitiveness. A European focus is claimed for this paper
because it is based on studies of European companies transferring technology to China.
However, many of the technology transfer issues are similar to those for other industrialised
countries. Indeed, the main differences in the features of technology transfer and their
implications for Chinese technological capabilities are between East Asian companies (mainly
from Hong Kong, Macao and Taiwan) and those from other industrialised countries (mainly
US, Japan and the EU countries). Therefore, the paper does not entirely focus on EU-China
technology transfer issues. The somewhat wider remit complements the other papers in the
volume by addressing issues associated with international technology transfer at the level of

Section 2 provides an overview of the role of FDI and other modes of technology transfer in
East Asian industrial development. Section 3 considers evidence on the motivations for
technology transfer of European businesses and carries out a strategic analysis of its
contribution to developing technological capability in China. Changes in the sectoral
distribution of production in manufacturing and development of comparative advantage in
selected sectors are examined in section 4 for evidence of changes in capabilities. Section 5

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

draws some conclusions on the role of technology transfer for China‟s technological trajectory,
especially identifying the more advanced sectors in which China‟s capability is developing.


Hayter and Han (1998) assess the efficacy of FDI as a means of acquiring know how by China.
The assumption underlying the “open door” policy was that FDI was essential for the transfer
of technological (and other) know how into the Chinese economy (Sit, 1985). However, based
on the literature on multinational enterprises (Dicken, 2003; Dunning, 1980; Dunning 1993),
Hayter recognises the paradox inherent in the role of FDI as a source of know how for host
economies since such know how is a part of the firm-specific knowledge which is the source of
the competitive advantage of investors. The implications of this paradox for the contribution of
technology transfer to the development of Chinese industrial capability are considered in this

The initiation of the “open door” policy can be formally traced to the Act of Joint Venture
Enterprises adopted in 1979 which recognised the legal rights of international firms and
permitted FDI in the form of joint ventures with local partners with a minimum 25 per cent of
foreign equity but no maximum. Initially FDI was limited to the four Special Economic Zones
(SEZs) of Shenzen, Zhuhai, Xiamen and Shantou but later laws extended the permissible areas
and offered further advantages such as patent protection, tax concessions and setting up of
wholly owned subsidiaries. As Table 1 shows, a very large proportion of the investment has
come from Hong Kong, Macao and Taiwan though the proportion from these sources has
diminished over time. The most important other sources of FDI are Japan, US and the
European Union (EU). In the last 5 years, EU‟s FDI has been on par with that from the US
and above that from Japan. However, since the EU economy is larger than the US and
Japanese, it could be argued that EU FDI is relatively low. The fall in the total proportion of
FDI from the 5 sources in the table over the period shows a clear trend of diversification of
sources including higher investment from Singapore and Korea in Asia (Simon, 1995) and the
rest of the world.

The distribution of FDI is significant for the transfer of know how since there are clear
differences in the motivations for investment and level of technology transferred between Hong
Kong, Macao and Taiwan on the one hand and the older industrialised countries. A number of

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

studies (for example, Chen, Chang and Zhang, 1995; Young and Lan, 1997; Shi, 2000; Zhao
and Zhu, 1998) show that FDI from Hong Kong, Macao and Taiwan tends to be by smaller
enterprises in relatively low-tech sectors to take advantage of low labour costs. The low-tech
investment from these sources has been a cause of some disappointment because of its
perceived low value in developing technological capability. However, investment and sub-
contracting from Hong Kong, Macao and Taiwan have developed production and management
capabilities to a standard required for exporting, and offered access to export markets. Such
production and management capabilities were the base from which the industrialised countries
of East Asia were able to develop their capabilities in stages and move up the product life cycle
to gain more advanced skills (OECD, 1996 and Hobday, 1995). It can also be argued that the
paradox of know how transfer through FDI by multinationals is less relevant for investments
from Hong Kong, Macao and Taiwan because the technology transferred is typically mature
and the knowledge, skills and market access offered by foreign investors are complemented by
the cost advantages offered by producers in China.

Table 1. Share of major source countries of realised FDI into China, 1986-2002

Unit: %
Hong Taiwan Japan US EU Total (from 5
Year Kong/Macao sources)
1986 59.2 - 11.7 14.5 8.0 93.5
1987 69.1 - 9.5 11.4 2.3 92.2
1988 65.6 - 16.1 7.4 4.9 94.0
1989 61.2 4.6 10.5 8.4 5.5 90.2
1990 54.9 6.4 14.4 13.1 4.2 93.0
1991 57.0 10.7 12.2 7.4 5.6 92.9
1992 70.0 9.5 6.5 4.6 2.2 92.9
1993 64.9 11.4 4.8 7.5 2.4 91.1
1994 59.8 10.0 6.2 7.4 4.6 87.9
1995 54.6 8.4 8.3 8.2 5.7 85.3
1996 51.0 8.3 8.8 8.3 6.6 82.9
1997 46.5 7.3 9.6 7.2 9.2 79.7
1998 41.6 6.4 7.5 8.6 8.8 72.9
1999 41.4 6.5 7.4 10.5 11.1 76.7
2000 38.9 5.6 7.2 10.8 11.0 73.5
2001 36.4 6.4 9.3 9.5 8.9 70.4
2002 34.8 7.5 7.9 10.3 7.0 67.5
Average 53.3 7.8 9.3 9.1 6.4 84.5
(1997-2002) 39.9 6.6 8.1 9.5 9.3 73.4

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

There is also disappointment about the level of technology that is transferred through FDI from
the industrialised countries. The initial policy to restrict FDI to cooperative ventures with
Chinese partners was an attempt at reducing this barrier. However, this device may not be
effective because of the unwillingness of foreign partners to transfer the know how, the nature
of the know how and the inability of Chinese partners to benefit from it. There have been cases
where cooperative ventures have been formed simply to take advantage of tax incentives and
other privileges with limited interest in collaboration (Young and Lan, 1997). Even within a
fully cooperative venture, foreign companies may wish to limit transfer of know how to protect
their core competences.

There is Chinese dissatisfaction with Japanese „show how‟ transfer instead of the preferred
„know how‟ transfer. Japanese firms may be reluctant to transfer the most advanced
technology because of its strategic importance, but the Japanese approach also reflects
preference for an incremental hands-on approach to ensure effective transfer of appropriate
technology compatible with their own strategic objectives (Simon, 1995; Grow, 1995). The
Japanese approach tends to be more software focused involving more collaboration training.
The US approach by contrast is more hardware focused and apparently more appealing to
Chinese technology recipients because US firms tend to supply the most advanced hardware.
Broadly, the European approach is somewhere between the Japanese and US. European
companies in general, and German companies in particular, are much admired in China for their
excellence in engineering, emphasis on quality and thoroughness in transfer once the
technology transfer decision has been made ( Volkswagen is singled out as a
company which has taken great care in transferring technology and increasing local sourcing,
though the range of models for which volkswagen has transferred technology has been limited.
Alcatel (Belgium) is also admired for its demonstration of commitment to China by transferring
advanced technology.

Effectiveness of transfer also depends on the nature of the knowledge, the mode of transfer,
the effort and commitment of the owner and the capability and commitment of the recipient. At
one extreme, the technology could be fully “explicit” and can be acquired from written
instructions, design drawings and prototypes. At the other extreme, it could be fully “tacit” in
the skills and knowledge of persons in an organisation. Transfer of tacit knowledge typically
requires closer long-term collaboration between the partners. In practice, most technologies

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

are not at one extreme or another but include varying combinations of explicit and tacit
knowledge. There are also different levels of competences such as ability to use the
technology, adapt it, stretch it and eventually to become more independent by developing,
designing and selling it (Lall, 1992; Barbosa and Vaidya, 1997). Therefore capability in a
technology does not arise from a single act of technology transfer but either from continuing
collaboration between the supplier and acquirer or further development efforts by the acquirer.

China is not the first country to face the problem of developing technological capability from
limited know how transfer by foreign investors. In other East Asian countries which faced
similar problems, Matthews (2001) has identified patterns of developing technological
capabilities which include (a) a foundation of manufacturing competence based on low-tech
sub-contracting, (b) attainment of higher levels of capability and new product development
through existing capabilities to leverage market access, for example through OEM (Own
Equipment Manufacture) orders from international firms, and (c) using the knowledge gained
from OEM to leverage greater technological capability and a stronger market position through
ODM (Own Design and Manufacture) and OBM (Own Brand Manufacture). The leveraging
process is complemented by deepening internal technological knowledge and capability
through training, R&D and accessing external sources of knowledge such as public sector
institutions and national researchers, technicians and managers working in industrialised
countries. The internal manufacturing and R&D capabilities also enable firms to combine know
how acquired from different sources.

Linsu Kim (1997) and Seongjae Yu (1999) have identified similar ingredients and patterns in
the industrial development of South Korea and the success of Samsung in advanced electronics
products. Hobday (1995) emphasises the role of learning at the firm level, starting with sub-
contracting and going backwards along the product life cycle to gain more advanced
capabilities. Matthews (2001) identifies three models for leveraging the development of
capability. The first is the Korean model under which large domestic firms were supported and
encouraged by the State to enter new technology sectors. The second is the Taiwan model
under which public agencies acquired new technologies, developed product and process
expertise and diffused the technology to enterprises. The third is the FDI model followed by
Singapore in which conditions were created for multinationals to transfer know how.
Matthews (2001) recognises some features of all three models in China. Nolan and Yeung

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

(2001) and Nolan (2001) draw attention to the success of some large public sector enterprises
in restructuring and developing capabilities and competitiveness. The experience of other Asian
late industrialisers provides the context for examining the role of international technology
transfer in the development of China‟s technological capabilities.

This section has provided (a) an overview of some major questions on the role and limitations
of international technology transfer in developing technological capability and (b) a basis for
assessing developments in China. Based on our work on technology transfer from Europe and
on changes in China‟s production and trade pattern for manufactured goods, we draw
conclusions on:
 the role and limitations of foreign enterprises in developing technological know how;
 development of China‟s comparative advantage in selected sectors, and
 the learning models being pursued by China and the technological trajectory they imply.



Since the early 1980s, European and other companies have been transferring technology and
other know how to China along with increased FDI in return. Many foreign firms have entered
into collaborations2 with Chinese partners involving some technology transfer because of
policy constraints and incentives and possible advantages of local knowledge, connections and
market access offered by local partners. Evidence from a survey of selected EU companies
transferring more advanced technology to China (Bennett et al, 2001) is examined here.

The following sectors and technology areas in which Europe is considered to have particular
technological strengths were identified for inclusion in the study:
 aerospace and aviation
 specialist electronics
 power generation equipment, other energy and energy management
 life sciences, pharmaceuticals and biotechnology
 materials and materials design

The focus here is on technology based collaborations of strategic importance and not on limited technology
licensing agreements and one-of transactions for mature technologies.

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

 motor vehicles and components

 machinery, machine tools and computer integrated manufacturing
 telecommunications equipment.

The list includes some advanced technology sectors3 and other less advanced sectors identified
by the European Commission (CEC, 1995, 1998) as the sectors for technology cooperation
with China and therefore the study enables a broad strategic assessment of the implications of
different levels of technology transfer.

Interviews were conducted with senior managers involved in strategic decisions relating to
their companies‟ technology transfer to China. Table 2 indicates the broad sectors in which the
activities of the sample companies fall. The firms range from very large global conglomerates
to much smaller specialists4. The parent companies are based in eight EU countries (Denmark.
Finland, France, Germany, Italy, Spain, Sweden and UK). The most strongly represented
sectors are “specialist electronics”, “power generation equipment, other energy and energy
management” and “telecommunications”.

Table 3 summarises the nature of the technologies transferred, features of technology

recipients, and the reasons for the technology transfer. The figures in the table are percentages
of the total number of technologies transferred. All the firms had transferred at least one
technology, 16 two technologies and 10 had transferred three technologies giving a total of 46
technologies. It is striking that only 13 per cent of technologies transferred were
“established/mature”. Evidently, competition and the leverage of the market and other strategic
advantages offered by China were important considerations in transferring technologies (a)
comparable with competitors, (b) providing a technological lead, and (c) based on recent
innovations. Earlier studies of technology transfer by European firms to China (Bennett et al,
1997b; Glaister and Wang, 1993) draw similar conclusions on European firm‟s motivations for
technology transfer.

Based on R&D intensity data, OECD (2001) identifies „aircraft and spacecraft‟, „pharmaceuticals‟, „office,
accounting and computing machinery‟, „radio, television and communication equipment‟ and „medical and
precision and optical instruments‟ as high-tech.
Most of the companies did not object to being named but the decision was taken not to disclose any of the
names because two companies wished to remain anonymous.

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

Table 2: Sectors represented by the respondent companies

Machinery, machine tools

and energy management

and computer integrated

equipment, other energy

Aerospace and aviation

Materials and materials

Specialist electronics

pharmaceuticals and

Motor vehicles and

Power generation
Life sciences,


1 Energy management X
2 Energy processes X
3 Gas turbine equipment X X X
4 Glass manufacturer X X
5 Machine tools 1 X
6 Machine tools 2 X
7 Machine tools 3 X
8 Machine tools 4 X
9 Machinery X
10 Motor vehicles 1 X
11 Motor vehicles 2 X
12 Pharmaceuticals X
13 Powergen 1 (equipment) X
14 Powergen 2 (controls) X X
Rubber sealing
15 products X X
16 Specialist electronics 1 X
17 Specialist electronics 2 X X
18 Telecomms 1 X
19 Telecomms 2 X
20 Telecomms 3 X

A large proportion of the technologies (83 per cent) required training and learning within
continuing collaboration between suppliers and acquirers. Seventy four per cent of technology
transfer was horizontal, a feature common to transfer between industrialised and industrialising
countries. Technology collaborations with local producers in the same sector enable better
market access but also increase the threat of local acquirers becoming potential competitors.
Developing longer term alliances with Chinese partners could reduce this threat. In addition, a
substantial proportion of companies sought to benefit from low cost production.

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

Table 3: Features of technology transfer transactions of 20 EU companies

Percentage of
Features of technology
Product 50
Process 9
Product & process 41
Own recent innovation 20
Technological lead over competitors 30
Comparable to competitors 57
Generally used technology (uses across sectors) 30
Specialised technology for the sector 70
Established/mature technology 13
Transferable through supply of equipment and design 17
with limited training and experience
Not transferable without practical training and learning 83
through experience over time
Features of technology recipient
(more than one response possible)
Producer in the same sector 74
Customer 20
Supplier 13
Reasons for transfer
(more than one response possible)
Market access 80
Forming long term technological/commercial alliance 39
Cost advantage 57
Favourable policies and incentives in host country 33
Policy requiring local sourcing and/or technology transfer 46
As part of company globalisation strategy 48
Response to competitors‟ moves (actual or potential) 33
Other 7

As Table 4 shows, joint ventures dominate with up to 58 per cent of the technologies
associated with this mode of transfer, again indicating a long-term strategic position being
taken by a substantial proportion of companies, though a small but significant proportion of
companies have transferred technology to wholly owned subsidiaries. Joint ventures clearly
offer Chinese partners opportunities to acquire technology. In addition, recent studies show
evidence of substantial spillover effects in selected sectors (Liu et al, 2001; Liu, 2002) related
to FDI and not only technology based alliances and demonstrate the capabilities of Chinese
firms in these sectors to learn from demonstration and employee turnover effects.

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

Table 4: Modes of technology transfer

Percentage of

Mode of Technology Transfer (more than one answer possible)

One-off sale 6
Licensing 21
Subcontracting relationship 10
Co-production 15
Joint venture 58
Setting up a wholly owned subsidiary 15

Note: Figures do not add up to 100% as some modes of technology transfer included more than one
arrangements. For example, some joint ventures also incorporate licensing agreements.

Most of the respondents planned to expand operations in China and transfer more advanced
technology in the future. However, there were also concerns about the protection of their
technologies. Seventy-eight percent of the firms felt that intellectual property rights relating to
their technologies were not adequately protected. Although, advanced technology had been
transferred, 75 per cent of companies stated that they had not transferred key parts of their
technologies. Only 25 per cent of the companies had transferred R&D capacity though 47 per
cent stated that they had plans to do so in the future.

Table 5 summarises the answers to questions relating to assessment of local capability to

absorb and use technologies and to replicate them, thereby posing a future competitive threat.
In general the respondents accepted that there was capacity in China to absorb and eventually
to replicate the technology. It was estimated that 25 per cent of the technologies transferred
could be absorbed and used within one year and a further 44 per cent within 3 years. The
companies recognise the risk of loss of competitive advantage through transfer and the
growing capabilities of Chinese companies. The most common responses to the threat were to
“maintain a lead through R&D” (90 per cent of respondents) and “collaboration with Chinese
partners” (50 per cent) and “restricting amount/type of technology transferred to China” (50
per cent). Clearly many firms seek to combine maintaining advantage through R&D with
defensive strategies to protect their competitive advantage. For Chinese companies, market
leverage and the other attractions of China to foreign companies have offered opportunities to
develop technological capabilities but there are likely to be differences between sectors in this

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

Table 5: Assessment of Chinese capability to absorb, use and replicate technologies

Local capability to Local capability to

absorb and use replicate
% within 1 year 25 2
% between 1-3 years 44 27
% between 3-10 years 25 48
% More than 10 years 6 23

Information from the survey has been used here to make a broad strategic assessment of
differences between sectors in the Chinese partners‟ potential for acquiring capabilities. Two
features of the technology transferred which affect this potential are the level of technology
and the comprehensiveness of the technology being transferred. In Figure 1, the level of
technologies transferred by European companies have been evaluated from the information on
whether they (a) were the companies‟ own recent innovations, (b) provided a lead over their
main competitors, (c) were comparable to their main competitors, or (d) were established
mature technologies.

Figure 1: Risk of loss of advantage for European firms and

potential for Chinese capability development
Medium Powergen 2 High
Telecomms 1,2&3

Specialist electronics 1 & 2

Pharmaceuticals Glass manufacturer

Level of Energy processes

Powergen 1
technology (equipment)

Machine tools 3
Motor vehicles 1 Motor vehicles 2

Low Medium

Low Comprehensiveness of technology High

The term “comprehensiveness” in Figure 1 refers to the completeness of the technology that is
transferred. Comprehensiveness may range from a small part of the product or process
technology at one extreme (for example final assembly of a product from imported parts) to
complete product and process know how. The risk of loss of advantage is very low for an

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

established technology which is only partially transferred. Such technology may be available
from other sources and is unlikely to be a core element of the competitive advantage of the
supplying company. For the Chinese partner, the capability attained will be limited. By
contrast, supply of the complete technology in which the owner has a technological lead will
pose a much higher risk for the supplier but also offer Chinese partners greater potential for
developing capability. For example, “Motor vehicles 2” has transferred a complete assembly
line and sources 90 per cent of parts locally, so the comprehensiveness of the technology is
high. On the other hand, the level of technology transferred is not high since it is for assembly
of an old model and the assembly plant uses established technology. The risk of loss of
advantage is reduced for the supplier but the comprehensiveness of the technology and local
sourcing provide a base for developing capability. In contrast “Motor vehicles 1” is only
conducting more limited transfers currently so the risk tends towards the low region and the
capability transferred is more limited.

The arrows in Figure 1 show the future direction of movement according to company
responses. For example, for “Power generation 1” (equipment), the technology being
transferred is neither very advanced nor very comprehensive at present but the companies
accept that because of Chinese government policy pressures and strategies of competitors, they
will have to move in the direction of more advanced and comprehensive technology transfer.
“Glass manufacturer” has transferred advanced process and product technology (while
withholding the key elements) and does not see the need to go any further. The “Specialist
electronics” companies and “Pharmaceuticals” (for insulin) are protecting their advanced
technology by partial transfers while the “Telecommunications” companies have transferred
some of their most advanced and comprehensive technologies and the machine tools
companies have transferred fairly comprehensive technologies for selected models and were
intending to provide know how for more models.

Figure 2 provides a broad strategic appraisal of technology suppliers‟ preferences and the
benefits of technology transfer for Chinese companies. “Potential for capability development”
of each company‟s technology transfer in Figure 2 has been derived from the company‟s
position with respect to the level of technology supplied and its comprehensiveness in Figure 1
and “market growth” is based on current growth rates in the relevant sector in the Chinese and
world markets. Arguably, the preferred position for the technology supplier in Figure 2 (and

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

offering low potential for developing capability) is the bottom right hand corner, which
represents high market growth and low risk of loss of advantage. If all foreign technology
suppliers took this position, the potential for developing capabilities for Chinese firms would
be very limited. As Figure 2 shows, this is far from the case. European “Telecommunications”
companies have transferred the most comprehensive and advanced technologies (Figure 1) and
seen very high growth rates in recent years in China and worldwide. The mirror image of this is
that Chinese companies have opportunities to develop their capabilities and strengthen their
competitiveness. Evidence on this sector is examined further in the next two sections.

Fig 2 Technology transfer and potential for Chinese capability development

High High potential, HIgh potential and

low market growth market growth
Machine tools 3
Glass manufacture
Specialist electronics
Energy processes Telecomm 1,2&3
Potential Powergen 1 Risk reduction through
for (equipment) R&D
developing Motor
vehicles 2

Powergen 2
Low potential, (controls) vehicles 1 Lowest potential,
Low low market growth high market growth

Low Market growth High

“Machine tools 3” and “Energy processes” are in internationally mature markets but with
strong market prospects in China. For such products it may be difficult for companies located
in Europe to maintain competitive advantage. A possible strategy for these firms is to develop
collaborative ventures in China (as is the case with “Machine tools 3”) again offering high
potential to Chinese firms to develop capabilities. The remaining companies fall in-between in
terms of long-term prospects and risk. They are in China for market reasons, but for most of
their products (glass, power generating equipment, automobiles and insulin) the international
market is relatively mature internationally and their longer-term market prospects rest with
more advanced technologies and products. Market leverage offers Chinese firms opportunities
to acquire established technological capabilities in these sectors.

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

The overall conclusion is that the paradox inherent in the conflicting objectives of technology
recipients and suppliers is resolved by the market leverage and competitive pressures which
lead the suppliers to provide more know how than they intended. For Chinese firms to fully
benefit it is necessary to develop their own complementary capabilities as the experience of the
successful firms in Korea and Taiwan indicate.


The main question addressed in this section is whether there are any discernible effects of
development of high technology capability in China‟s production and export performance.
Table 6 shows the shares of manufacturing sectors in the total manufacturing output in 1985,
1996 and 2001, ranked according to their contribution to total manufacturing output in 2001.
The table also shows changes in the shares of the sectors between 1985 and 2001. For
example, „textiles and garments‟ sector‟s share of manufacturing output at 11.6 per cent in
2001 was the largest of all sectors. However, it had fallen from 17.3 per cent in 1985. The last
column in Table 6 shows the 2001 share as a fraction of the 1985 share for each sub-sector.
Therefore, the number 0.7 for textiles and garments in this column shows that the share in
2001 was about 70 per cent of the share in 1985. As the output of the manufacturing sector
was growing rapidly over this period, this fall in share still implied an increase in the actual
value of output.

At this level of aggregation, it is difficult to distinguish precisely between high, medium and
low technologies. However, based on OECD classification of sectors, „electronics and
communications‟, and „medical and pharmaceutical products‟ are high technology sectors. The
share of „medical and pharmaceutical products‟ increased gradually over the period. For
electronics and communications, the share increased gradually from 4.5 per cent in 1985 to 5.6
per cent in 1996 but the increase was much sharper since 1996 to 11.3 per cent in 2001.
Caution must be used in interpreting the above evidence since the available data are at a very
aggregate level and therefore each of the industrial sectors in Table 6 covers a wide range of
products. For example, manufacturing of basic calculators, now a relatively low technology
activity, is part of the electronics and communications sector.

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

Table 6: Share of manufacturing sectors in total manufacturing output

Change in share
Manufacturing sector 2001 1996 1985 2001(%) / 1985(%)
Textile and garment industries 11.6 12.5 17.3 0.7
Electronic & telecommunications 11.3 5.6 4.5 2.5
Transport equipment 9.1 7.8 6.9 1.3
Raw chemical materials and 8.9 10.0 9.6 0.9
chemical products
Food processing and manufacturing 7.8 8.4 6.7 1.2
Electrical equipment & machinery 7.7 6.3 6.4 1.2
Tobacco processing 6.1 6.4 6.7 0.9
Medical & pharmaceutical products 4.0 3.0 2.1 1.9
Metal products 4.0 4.1 4.3 0.9
Beverage manufacturing 3.6 3.9 2.9 1.3
Special purpose equipment 3.5 4.4 3.7 1.0
Smelting & pressing of ferrous 3.3 8.4 9.8 0.3
Smelting & pressing of non-ferrous 3.3 2.6 2.9 1.1
Plastic products 3.0 2.7 2.2 1.4
Papermaking & paper products 2.6 2.8 2.6 1.0
Leather, furs, down & related 2.2 2.3 1.3 1.7
Rubber products 1.4 1.6 2.7 0.5
Printing & recording medium 1.4 1.4 1.6 0.8
Instruments, meters, cultural & 1.3 1.2 1.7 0.8
office machinery
Chemical fibre 1.2 1.6 1.6 0.8
Timber processing, bamboo, cane, 1.1 1.2 1.0 1.1
palm fibre & straw products
Cultural, educational & sport 1.0 1.0 0.8 1.3
Furniture manufacturing 0.7 0.7 0.9 0.8

Total 100.0 100.0 100.0

Source: China Statistical Yearbook, various issues.

While the relatively high technology industries appear to have been the gainers, the low-tech
and labour intensive textile and garment industry was the biggest loser in relative terms. This
does not necessarily mean that China‟s industrial production has shifted significantly away from
labour intensity overall. The shares of other labour intensive industries such as plastic products,
leather, furs, down and related products actually rose. The picture for the medium technology
industries was mixed with increases in the shares of electrical equipment and machinery, and

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

food processing, but declines in rubber products and instruments. The shares of special
purpose equipment manufacturing and metal products remained about the same. There is
therefore some evidence of an increase in the share of high technology industries, especially in
the electronics and telecommunication equipment sector, and a relative decline in the
contribution of low technology, labour intensive industries between 1985 and 2001.

Revealed comparative advantage (RCA) indices have been calculated at the more
disaggregated 3-digit SITC (Standard International Trade Classification)5 level to assess
changes in China‟s comparative advantage between low-tech, medium-tech and high-tech
industries. The RCA index represents a country‟s share in world exports of a given product
group divided by its share in the world exports of all goods (or an appropriate category of
goods such as manufactured products6). Therefore country i‟s RCA index for product j is:

RCAij = (Xij / Xwj ) / (Xit / Xwt )

where the w subscript denotes world exports and the t subscript denotes exports of all
products. The RCA index shows a country‟s share in world exports in a product group relative
to its share in the world exports of all goods. For example, if a country has 6 per cent of the
world market in computers, whereas its share of world exports of all products is 2 per cent, the
RCA (also known as the export specialisation index) for computers is 3. The value of the index
over 1 indicates that the country has a stronger position in the world market for computers
than its average position for all products exported. Conventionally, a country is said to have a
revealed comparative advantage in product j if the RCA index has a value more than one and a
revealed comparative disadvantage if the index has a value less than one. In addition, changes
in the RCA index over time indicate improving or declining comparative advantage.

Table 7 lists 28 product groups separated into high, medium and low-tech, based on OECD
(2001) and Table 8 shows their RCA indices for the years 1987 to 2001. All the sectors
identified by the OECD as high-tech based on R&D intensity criteria are included in the list
though some of these are included as medium-tech sectors because in the Chinese context this

Date at this level of disaggregation in UN International Trade Statistics Yearbooks from 1987 have been used.

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

is a more appropriate classification for them (see note under Table 7). For comparison, RCA
indices have been calculated for a selection of medium and low-tech sectors. Unfortunately,
available data do not allow for a more refined product classification based on four or five digit
levels. Consequently within the high-tech product group, there may be some low-tech products
and low-tech product groups may include some higher-tech products (see note under Table 7).
Therefore, the categorisation of product groups according to technology levels in Table 7 is an

Table 7: Product groups in the study

High Tech
Aircraft and related products Medicinal and pharmaceutical products
Automatic data processing equipment Telecommunications equipment, parts and
Electro-medical and x-ray equipment accessories

Medium Tech
Cycles (motorised and non motorised) Other power generating plants
Electric power machinery Other road motor vehicles
Electrical machinery Radio broadcast receivers
Engines and motors Railway vehicles
Household type equipment Rotating electric plants
Lorries and other specialised motor Ships and boats etc.
vehicles Sound recorders, phonographs
Office machines Television receivers
Optical instruments

Low Tech
Footwear Travel goods and handbags
Toys and sporting goods etc. Tools
Men‟s outerwear (not knit) Watches and clocks

Note: OECD (2001) classifies radio and television equipment, office machines and optical instruments as high-
tech. These have been put in the medium-tech category in this study since Chinese production in these sectors
has been predominantly manufacturing and assembly based on established technology. Within each group in
Table 7 there may be some products which do not fall strictly within the technology levels assigned. For
example, tools have been classified as low-tech, but they may include high-tech precision tools. Similarly,
watches and clocks could include high precision electronic components for watches.

It is possible for the RCA values to be distorted by government interventions such as export
subsidies. However, assessments of the significance of such distortions in China indicate that
they have been declining in importance since 1979 and so the RCA indices and other indicators

As the concern of this paper is with comparative advantage of manufacturing sub-sectors. the value of all
manufactured products has been used as the base in calculating the RCA indices. All products would include
agricultural and other primary products.

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

of trade performance for manufactured products broadly reflect changes in the competitiveness
of Chinese producers (Foster, 1998; Zhang, 2000). According to Table 8, China has a
comparative disadvantage (i.e. average RCA index less than 1) in high-tech product groups
overall indicated by the unweighted average RCA indices, a comparative advantage in the
selected low-tech product groups and a mixed situation in the medium-tech sectors. However,
the table also shows evidence of improving comparative advantage in some medium-tech and
high-tech sectors.

Two of the high-tech product groups, „automatic data processing (ADP)‟ and
„telecommunications equipment‟ show the most striking changes in RCA indices between 1987
and 2001 (see table 8). RCA indices for “automatic data processing (ADP)” start from a very
low base in 1987 but rise consistently to show revealed comparative advantage by 2001. A
number of foreign computer and peripherals manufacturers such as Compaq, IBM, HP and
Delta Electronics (Taiwan) have invested in China as a part of global outsourcing of
electronics products, components and peripherals and to gain access to the growing Chinese
market (Asiamoney, 1997). Chinese enterprises such as Legend and the Founder Corporation
have also upgraded their capability to manufacture computers (principally for the domestic
market) and components and peripherals for export (Business Week, 1997, and authors‟
company interviews).

„Telecommunications equipment‟ (SITC 764) also starts from comparative disadvantage in

1987 and is the only other high-tech product group to achieve advantage during the period.
Both exports and imports of SITC 764 consisted mainly of „telecommunications parts and
sound equipment‟ (SITC 7649). Although exports of this sector have been growing, imports
are also large and growing resulting in a trade deficit in this sector. The rising RCA, the large
volume of trade in parts and imports being greater than exports indicate integration of the
Chinese telecommunications sector with the world industry and strong domestic demand for
telecommunications equipment. Exports may consist of relatively low-tech products and
components such as analog switches and hand-sets with more advanced products being
imported (Tan, 2002). However, evidence from the two European telecoms companies in our
survey (see section 3) suggests that participation in joint ventures has enabled a number of
Chinese telecommunications manufacturers to develop the capability to copy advanced
technology foreign products and adapt them to the local market.

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

Table 8: Revealed comparative advantage, 1987-2001: selected product groups

SITC 1987 1989 1991 1993 1995 1997 1999 2001
High-tech product groups
541 Medicinal and pharmaceutical products 1.00 1.06 0.89 0.70 0.73 1.12 1.08 0.88
752 Automatic data processing equipment 0.03 0.05 0.10 0.26 0.62 0.87 1.17 1.47
764 Telecommunications equipment, parts 0.27 0.41 0.54 0.91 1.15 1.06 1.20 1.54
and accessories nes
774 Electro-medical and x-ray equipment 0.02 0.05 0.11 0.04 0.11 0.12 0.09 0.22
792 Aircraft and related products 0.12 0.01 0.02 0.10 0.07 0.08 0.12 0.06
Unweighted mean (high-tech) 0.29 0.32 0.33 0.40 0.54 0.65 0.73 0.83

Medium-tech product groups

714 Engines and motors nes 0.01 0.02 0.02 0.05 0.03 0.03 0.04 0.05
716 Rotating electric plants 0.46 0.68 0.83 1.57 1.44 1.44 1.46 1.31
718 Other power generating plants 0.07 0.06 0.13 0.12 0.27 0.21 0.20 0.30
751 Office machines 0.64 0.78 0.74 1.05 1.81 2.36 2.41 2.70
761 Television receivers 1.23 1.76 1.80 1.81 1.18 0.76 0.87 1.06
762 Radio broadcast receivers 3.92 5.93 5.21 3.78 3.80 4.59 4.04 3.51
763 Sound recorders, phonographs 0.09 0.30 0.35 0.88 1.52 1.77 2.06 3.15
771 Electric power machinery nes 0.17 0.56 0.76 1.91 2.35 2.10 2.59 2.40
775 Household type equipment nes 0.27 0.61 0.98 1.99 2.11 1.67 2.10 2.46
778 Electrical machinery nes 0.35 0.49 0.54 0.88 1.05 1.00 1.28 1.48
782 Lorries, special motorised vehicles nes 0.02 0.04 0.04 0.07 0.08 0.05 0.03 0.04
783 Road motor vehicles nes 0.01 0.04 0.04 0.04 0.02 0.08 0.04 0.07
785 Cycles (motorised and non-motorised) 0.75 1.30 2.10 1.73 1.94 1.79 2.08 2.71
791 Railway vehicles 0.06 0.33 0.09 0.26 0.32 0.52 0.34 0.17
793 Ships, boats and related products 0.52 0.37 0.59 0.31 0.81 1.11 0.96 0.83
871 Optical instruments 0.20 0.33 0.39 1.09 1.35 1.82 1.75 1.52
Unweighted mean (medium-tech) 0.55 0.85 0.91 1.10 1.26 1.33 1.39 1.48

Low-tech product groups

695 Tools 3.11 1.95 1.49 1.68 1.60 1.26 1.19 1.20
831 Travel goods and handbags 3.81 3.51 2.86 6.56 6.55 8.08 7.73 6.41
842 Men‟s outerwear (not knit) 4.04 4.32 3.84 6.44 6.09 4.54 3.93 3.89
851 Footwear 1.55 3.54 4.82 6.02 5.14 5.43 5.51 4.85
885 Watches and clocks 11.98 3.51 3.36 3.26 2.95 3.08 3.00 2.15
894 Toys, sporting goods and related 3.40 5.44 4.99 5.43 5.01 6.65 6.35 1.37
Unweighted mean (low-tech) 4.65 3.71 3.56 4.90 4.56 4.84 4.62 3.31

Note: In this and following tables, nes = not elsewhere specified

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

The „medical and pharmaceutical products‟ group started with a neutral position with the RCA
index very close to 1 and has remained at about the same level with some fluctuations over the
period. This group includes traditional Chinese medicines as well as Western pharmaceutical
products. The relatively high RCA at the beginning of the period is possibly because of
strength in traditional medicines which is likely to have remained throughout the period. The
later changes in RCA are possibly explained by changes in export performance on western
medicines (CIEC, 1998). According to Nolan (2001), Sanjiu has been successful in the
domestic pharmaceuticals market and as an exporter by specialising in traditional medicines
while the pharmaceutical sector overall remains fragmented and unable to compete globally.
More recent small improvements in RCA can be attributed to higher exports of non-patented
generic medicines and collaborations of Chinese firms with foreign producers to benefit from
lower costs.

The RCA indices for „aircraft and related products‟ were well below 1 (not exceeding 0.2)
throughout the period. Much of the activity in this sector was negotiated off-set production
though some foreign manufacturers also took advantage of low labour costs in China to
manufacture parts and assemble complete aircraft for domestic and export markets (Mecham,
1993; Smith, 1991; Proctor, 1992). China has made several attempts to develop the civil
aviation sector by restructuring enterprise and seeking collaborations with foreign firms. Given
the dominance of the two major players (Boeing and Airbus) in the global civil aircraft market
and the high R&D and specialist knowledge capability requirements, the restructuring efforts
have not been successful and Chinese enterprises operate mainly as sub-contractors for foreign
business (Nolan, 2001). „Electro-medical and x-ray equipment‟ also had consistently low RCA
indices for the whole sample period though there was some improvement in later years with
foreign companies such as Siemens and their Chinese partners developing export markets.

The results for the medium-tech products are mixed (Table 8). For some medium-tech
products, the RCA remains consistently low throughout the period („engines and motors‟,
„other power generating plants‟, „lorries, special motorised vehicles‟, „road motor vehicles‟ and
„railway vehicles‟. The very low RCA category includes sectors which are not high-tech
according to OECD criteria but they typically require high levels of investment for production
as well as product development. The most striking examples of these sectors are the road
motor vehicles and lorries sectors which are dominated by large multinationals which organise

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

their production and suppliers on a global basis to serve the major markets of North America,
Western Europe and East Asia (Dicken, 2003). The Chinese industry has been highly
fragmented with over 100 vehicle manufacturers producing basic vehicles using outmoded
product and process technologies for the domestic market. While the government industrial
strategy identified automotive as an industry of strategic importance in the early 1990s and
announced plans for restructuring it with an important role for joint ventures with foreign
enterprises (Campbell Haynes, 1995), international vehicle manufacturers saw China as a
relatively small but fast growing market (Economist Intelligence Unit, 1997). While the policy
of encouraging foreign enterprises has continued, China has downgraded the strategic
importance of the industry in its industrial policy (Pilmanis, 1998). The low RCA index
indicates that China is very far from gaining competitive advantage in vehicle manufacture,
though there is increased activity in this sector by foreign enterprises seeking to benefit from a
rapidly growing domestic market.

A number of medium-tech product groups (for example „radio broadcast receivers‟, „office
machines‟, „cycles (motorised and non-motorised)‟ „household type equipment‟ and „optical
instruments‟) have high or rapidly rising RCAs. Although China had comparative advantage in
„cycles‟ (SITC 785) from as early as 1989, about 70 per cent of exports of this product group
is accounted for by non-motorised cycles, which should be treated as low rather than medium-
technology products. RCA indices for „television receivers‟ increase until 1993 but are lower in
later years, possibly indicating slower growth in exports in relation to other products.

The products with high and improving RCAs in the medium-tech category have some
distinctive features. A number of them are in the consumer electronic and electrical goods
sectors (e.g. „sound recorders and phonographs‟ „household type equipment‟ and „television
and radio broadcast receivers‟) and the remainder are in light electrical machinery („rotating
electric plant‟ and other electrical machinery). A large number of public enterprises acquired
technology to manufacture televisions and other consumer electronics products in the 1980s.
By 1987, China had become the world‟s largest producer of television receivers (Dicken,
2003) though its RCA index remained relatively low because of the high domestic demand.
According to Chinese government figures, the electronics industry was growing at 20 per cent
per year in the early 1990s and overseas sales of electronics products brought in nearly US$6.9
billion in 1992 (O‟Kane, 1994) and US$24 billion in 1997. Foreign investment in the abSpecial

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

Economic Zones and restructuring and technological upgrading of some state enterprises
increased exports of products and components in these product groups under sub-contracting
arrangements or OEM (WTEC, 1997). For other medium-tech sectors such as „household type
equipment‟ and electrical machinery also, China offers a low-cost production base for OEM
and sub-contracting arrangements though a number of firms such as Haier and Konka have
begun to export consumer products under their own brand names.

As expected, the RCAs for all the low-tech sectors are well above 1 (Table 8). „Travel goods
and handbags‟, „men‟s outerwear‟, „footwear‟ and „toys and sporting goods‟ are traditional
low-tech, unskilled and semi-skilled labour-intensive export products in which China has high
and rising RCAs throughout the study period. The main explanation for this is use of China as
a low labour cost export base by foreign firms through sub-contracting, wholly owned
subsidiaries or joint ventures.

RCA indices for product groups do not show the level of exports and their importance for the
economy. For example, a high RCA for a product group with low world exports may represent
lower exports than a lower RCA in a product group with larger world exports. Further, an
increase in RCA may not represent an increase in exports since an increase in RCA may not be
because of growth in exports from a country, but because of a fall in total world exports while
the country maintains its level of exports. From this point of view, high and/or growing RCA in
a product group with large and growing world exports represents a stronger performance and
a greater contribution to economic growth than a similar RCA in a smaller and slower growing

Examining changes in RCA indices at the product group level alongside evidence on the size
and growth of world exports for the products over the same period provides a better overview
of the impact of changes in comparative advantage on the economy. Table 9 provides this
overview. For each product group in Table 9, the numbers in brackets are, respectively, annual
world export growth in per cent between 1987 and 2001, the size of world exports in billion
US$s in 2001 (from UN International Trade Statistics Yearbooks), the 2001 RCA index
divided by the 1987 RCA index as an indicator of the shift in China‟s RCA over this period,
and the RCA index in 2001. The first two (i.e. growth and size of world exports) are indicators
of world market attractiveness, while the last two are indicators of China‟s comparative

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

advantage. For example, for the „office machines‟ product group the annual rate of growth in
world exports is 1.6 per cent, the value of world exports in 2001 was US$11.6 billion, the
RCA has increased 4.2 fold between 1987 and 2001, and the RCA in 2001 was 2.7. The
product groups with large improvements in RCA, or those demonstrating a balance between
good RCA improvement and an RCA value higher than 1 in 2001, have been shown in bold
italics in Table 9.

Among the high-tech product groups, China‟s strongest performance is in telecommunications

and automatic data processing equipment. These are two product groups with the highest
world market attraction indicators, shown by their world export growth and the size of the
world export market. The table also shows a number of low and medium-tech product groups
in which China has comparative advantage that fall into medium and high export attractiveness
categories (e.g. „office machines‟, „sound recorders and phonographs‟, „household type
equipment‟, „men's outerwear‟, „toys and sporting goods‟, „rotating electric plant‟, „electric
power machinery‟, „footwear‟ and „electrical machinery‟. Evidently, China has been improving
its comparative advantage in the two high-tech product groups with the highest world market
attractiveness and a number of low- and medium-tech world markets with medium or high
market attractiveness.

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

Table 9 Export market attractiveness and China's comparative advantage

Value of world exports Small (less than $20b.) Medium (between $20 and $40b.) Large (more than $40b. but less than Very large (more than $100b.)
Annual growth of world exports

Low (less than 5%) Other power generating machinery (Medium- Sound recorders, phonographs (Medium- Medicinal and pharmaceutical products
tech, 2.7%, $5.9b, 4.3, 0.3) tech, 3.7%, $23.1b, 34.9, 3.2) (High-tech, 1.9%, $34.5b, 0.9, 0.9)
Railway vehicles (Medium-tech, 3.6%, $8.5b, Footwear (Low-tech, 4.1%, $37.8b, 3.1, Lorries, special motor vehicles nes
2.8, 0.2) 4.9) (Medium-tech, 4.0%, $55.6b, 1.8, 0.04)
Office machines (Medium-tech, 1.6%, $11.6b,
4.2, 2.7)
Radio broadcast receivers (Medium-tech,
2.4%, $13.6b, 0.9, 3.51)
Watches and clocks (Low-tech, 1.9%, $13.5b,
0.7, 2.15)

Medium (between 5% and 8%) Electro-medical and x-ray equipment (High-tech, Ships and boats etc (Medium-tech, 5.5%, Electrical machinery nes (Medium-tech,
6.4%, $14.5b, 11, 0.2) $42.2b, 1.6, 0.83) 8.0%, $80.6b, 4.2, 1.5)
Cycles (motorised and non-motorised) Household type equip nes (Medium-tech,
(Medium-tech, 7.0%, $17.1b, 3.6, 2.7) 5.7%, $33.7b, 9.1, 2.5)
Travel goods and handbags (Low-tech, 4.3%, Men's outerwear (not knit) (Low-tech,
$11.1b, 1.7, 6.4) 7.1%, $35.3b, 1.0, 3.9)
Tools (Low-tech, 7.0%, $17.8b, 0.4, 1.2)

High (more than 8%) Optical instruments (Medium-tech, 10.1%, Electric power machinery nes (Medium- Aircraft and related products
$9.3b, 7.6, 1.5) tech, 10.7%, $27.4b, 14.1, 2.4) (High-tech, 9.0%, $113.1b, 0.5, 0.1)
Road motor vehicles nes (Medium-tech, 9.7%, Television receivers (Medium-tech, 8.2%, Automatic data processing equipment
$14.5b, 6.9. 0.7) $27.1b, 0.9, 1.1) (High-tech, 9.1%, $161.3b, 49, 1.5)
Rotating electric plant (Medium-tech, Telecommunications equipment and parts
8.4%, $29.8b, 2.8, 1.3) (High-tech, 11.3%, $181.8b, 5.7, 1.5)
Engines and motors nes (Medium-tech,
10.0%, $53.1b, 4.7, 0.1)

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu


This paper has attempted to assess the contribution of international technology transfer to the
development of China‟s technological capability based on a study of the motivations and
dilemmas of European businesses transferring technology to China and an assessment of
China‟s revealed comparative advantage in selected sectors. The dominant initial motivation of
European firms is market access but for a large proportion of them there are also longer term
strategic considerations - continued presence in the Chinese market and use of China as a
production base. The market access motivation contrasts with that of East Asian investors
though not with that of firms from other industrialised countries. The main reason for the
importance of the market access motivation of European businesses is probably the
manufacturing sectors in which they have strengths. Auto production, pharmaceuticals,
chemicals, aerospace and specialist electronics have been less conducive to sourcing from low
labour cost countries in the same way as garments and electronics components and products
(Dicken, 2003).

Policy makers and firms in China tend to ask potential suppliers for the most advanced
technologies and are disappointed when this is not forthcoming. Some Chinese enterprises
consider the Japanese approach to technology transfer to be less open than that of other
industrialised countries and there may be some justification in the view that Japanese
management style is less conducive to close cooperation (Grow, 1995). Nevertheless, in the
longer term the Japanese approach to technology transfer appears to be more successful and
compatible with developing capability in stages (see section 2). There are no doubt differences
between firms from different countries in their technology transfer motivations, approaches and
effectiveness. Nevertheless, as the discussion of the telecommunications sector later in this
section shows, there are also sector specific circumstances (such as the intensity of competitive
rivalry, rate of technological change, government policies and development of Chinese
capabilities) which influence the technology transfer strategies of foreign companies
irrespective of their nationalities. Grow (1995) cites the example of Fuji Electric to
demonstrate the development of networks of collaborating businesses by Japanese companies.
However, it would be possible to cite examples of European companies (e.g. Siemens) and US
companies (e.g. Motorola) which have also developed networks of subsidiaries, joint ventures
and suppliers.

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

The RCA analysis shows that telecommunications and automatic data processing equipment
are the two advanced technology sectors in which China has developed comparative advantage
rapidly in the last decade, thus confirming the conclusions of the strategic assessment based on
the survey of European companies with respect to telecommunications equipment. The other
sectors in which China has or is developing comparative advantage are low-tech labour
intensive sectors (garments, toys and sports products, travel goods, footwear and watches) or
medium-tech sectors such as consumer electronic and electrical products and selected
industrial products.

The Chinese technological trajectory, including the sector specialisation in electronics and
electrical products and telecommunications, appears to be following the East Asian latecomer
path in which early industrial development was based on gaining efficient manufacturing
capabilities in (a) consumer product industries with relatively low technology requirements,
and (b) low-tech labour intensive production processes in advanced technology sectors. Other
studies have shown that the rapid development of comparative advantage in the low-tech and
selected high-tech sectors has been through sub-contracting relationships with foreign firms,
which provide the required technological knowledge, world market access and new capital
(Leung et al, 1991; Lan, 1996; Thorburn and Howell, 1995).

A distinction should be made between two models of capability development in China. The
first is for light consumer and industrial products for export which starts with relatively low-
tech production under sub-contracting or in foreign-Chinese joint ventures. Under the second
model, leveraging the domestic market plays a more important part initially and exporting
capability develops later. Examples of the latter include telecommunications, power generation,
specialist electronics and machine tools. European industrial firms have contributed more to
China‟s capability development through the latter model because of the sectors in which they
have strengths. In both the models, more advanced capability development still requires the
ingredients and stages outlined in section 2.

Essential requirements for the success of low-tech export oriented sectors are (a) a favourable
policy regime, (b) domestic firms and sectors with the basic capabilities to respond to world
market demand and use the comparative cost advantage offered by the country‟s factor

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

endowments, and (c) inward FDI flows to take advantage of favourable cost and policy
conditions. However, as Matthews (2001), Linsu Kim (1997) and Hobday (1995) show,
gaining internationally comparable and competitive high-tech capabilities requires a process of
leveraging markets and acquisition of technology combined with deepening of firm level
capabilities through learning and R&D.

Some elements of the process of leveraging acquisition of technology from foreign companies
through market access in a high-tech and initially domestic market oriented sector can be seen
in the telecommunications sector. The initial government approach to two European
companies (Siemens and Alcatel) to set up joint ventures to produce switches was a clear case
of using the potential market and favourable treatment to attract investment and technology
transfer (Tan, 2002). Initially, the government restricted entry of more foreign manufacturers
of switches but these restrictions served to heighten the interest of the excluded firms and
when the restrictions were removed, others followed. A number of domestic suppliers such as
Huawei and EastCom have also started producing and exporting lower-tech equipment.

Currently China is upgrading and equipping its networks with the most modern systems such
as SDH equipment (Synchronous Digital Hierarchy) for long distance transmission and GSM
(Global System for Mobile Telecommunications). For two major European
telecommunications equipment companies interviewed, China is now the largest single market
for a range of products. However, because the market is large with high growth potential, they
also face fierce competition from companies from the USA (Motorola) and Japan (Fujitsu) and
therefore local production and technology transfer are parts of the strategy for maintaining a
strong position in the market. The main European suppliers of SDH equipment in China
include Ericsson, Siemens, Marconi Communications, and Alcatel. Other competitors are
Lucent Technologies and ECI Telecom (USA) and Nortel (Canada). Japanese companies such
as NEC and Fujitsu also supply equipment, but to a lesser extent. The main suppliers of GSM
equipment are Nokia and Ericsson (Europe) and Motorola (USA).

There are 10 foreign-invested plants making cellular mobile telephones, among which one is a
wholly owned foreign subsidiary and eight are majority foreign owned joint ventures. Ericsson
has been making switching equipment in China since the 1980s in collaboration with the
Beijing Wire Communications Plant and now has eight joint ventures in China producing

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

mobile telecommunications network equipment and cellular telephones. Alcatel started

production at its joint venture in Shanghai (Shanghai Bell) in 1985. Siemens has a number of
joint ventures for a range of products and Shanghai Nokia also has six joint ventures in China,
mainly manufacturing mobile telephones, GSM stations, networks and switches.

Chinese telecommunications manufacturers (joint venture partners and others) have acquired
the ability to copy foreign products and adapt them to the local market. One of the European
companies interviewed estimated that in some areas, the technology of the most capable
Chinese enterprises lags about 1 year behind that of western companies. For digital technology,
the knowledge is embedded in and protected by source codes. The Chinese side usually pushes
hard to have the source code included in the transferred technology. The company does not
reveal the source codes and changes them every six months though in some cases, the source
code has to be provided for effective localisation of the product. For example, with pay phones
it is necessary to supply source codes for designing LCD displays with Chinese characters. The
company estimated that with the acquisition of the source code, the more capable Chinese
companies would be 90 per cent of the way to fully replicating the technology.

While the telecommunications equipment sector is of particular interest for Europe and
European companies, there are other sectors in which there is evidence of development of
more advanced capabilities, notably consumer electronics. Two of the leading consumer
electronics enterprises are Changhong and Konka. Changhong was set up as a public enterprise in
1958 with Soviet assistance. In 1973, it started a R&D programme to design and develop a TV set.
The product was unsuitable for mass production and the company imported TV production
technology from Japan along with many other Chinese companies in the mid-1980s. The technology
transfer arrangement with Panasonic continued and with the combination of imported technology
and its own R&D, the company has TV sets on the Chinese market comparable with imports and is
now one of the largest TV manufacturers in the world. In 1997, following a number of years of
business relationship, Toshiba and Changhong announced closer cooperation including supply of
advanced DVD technology by Toshiba and collaboration in procurement and manufacturing
between the two companies. Toshiba expected to gain better access to the Chinese market through
Changhong‟s marketing and distribution channels. Konka, the largest consumer electronics
enterprise in China, has entered the US HDTV (high definition TV market) at prices undercutting
present sellers.

EU – China Technology Transfer: A Survey of Issues
Kirit Vaidya, David Bennett and Xiaming Liu

There are similarities in the Chinese technological trajectory and sectoral development with
trajectories in East Asia. However, there is not yet evidence of fully effective leveraging
strategies and getting close to the leading edge for selected technologies in telecommunications
and electronics, in the mould of the successes of Taiwan and Korea in technologies such as
semi-conductors, LCD (liquid crystal display) and CDMA (code division multiple access) for
cellular phones. China‟s trade performance in these sectors should also be put in perspective.
In spite of the successes in exporting telecommunications and data processing equipment, in
1999 China was the ninth largest exporter in the world for both these product groups and its
exports were likely to have been of the less advanced type. Another issue of concern is the
apparent tendency of some major Chinese enterprises to diversify into too many sectors and
products and dissipate the resources needed for deepening capabilities in core technologies.
For example, Haier‟s core business is in refrigerators and other domestic white goods and air-
conditioners but it has diversified into consumer electronics, computers and mobile phones
(The Economist, 2004). Legend, the largest computer manufacturer in China, is diversifying
into IT Services, cell phones, MP3 music players and personal digital assistants (PDAs) (Cohn,

The indications so far from East Asia and China are that for late industrialisers, the leveraging
strategy for developing capability is highly successful for certain types of advanced technology
sectors where the pace of technological change is fast, markets are growing rapidly and there
are a large number of competitors. Initially, it has been less successful in other major sectors
such as automobiles and pharmaceuticals. Given the sheer size of the Chinese economy,
China‟s accession to WTO, government policies which are difficult to decipher, and the
governance structures and strategies of Chinese enterprises, studying the technological
trajectory with Chinese characteristics and its impact on the world economy is going to be a
fascinating area for the unforeseeable future.

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