Joint ventures and technology adoption: A Chinese industrial policy that backfired

To spur technology transfer, emerging market policymakers often require foreign firms to form joint ventures (JVs) with domestic firms. Through knowledge spillovers, JVs may reduce technology acquisition costs for domestic firms. Yet domestic firm rents from JVs could discourage innovation through a cannibalization effect. Which force dominates is an empirical question. I address it with novel data on China's auto sector. In response to fuel economy standards requiring firms to upgrade technology or sacrifice quality, firms with JVs reduced quality and price relative to their counterparts. Consistent with cannibalization, firms with JVs drive the negative effect.