Paper Summary
Title: Machines could not compete with Chinese labor: Evidence from U.S. firms’ innovation
Source: Social Science Research Network
Authors: Jan Bena and Elena Simintzi
Published Date: 2022-12-01
Podcast Transcript
Hello, and welcome to paper-to-podcast. Today, we're diving into a research paper that I've only read 12% of, but don't worry, I'll make this informative. The paper is titled "Machines could not compete with Chinese labor: Evidence from U.S. firms’ innovation," authored by Jan Bena and Elena Simintzi, and published in December 2022.
The paper reveals a fascinating finding: US firms operating in China reduced their process innovations after the 1999 US-China bilateral agreement. Now, you may be asking, what are process innovations? They are new methods or processes used in production to cut costs. So, in short, cheaper Chinese labor led US firms to invest less in cost-reducing technologies. Talk about a twist in the tale of globalization!
The researchers cleverly used the 1999 agreement as a natural experiment and focused on US multinational firms operating in China. They compared these firms to control groups with subsidiaries in other low-wage countries or with operations abroad excluding China. And to measure process innovation, they used textual analysis of patent claims from the United States Patent and Trademark Office (USPTO).
Now, let's talk about the strengths of this paper. First, the use of a novel measure based on patent claims was a game-changer in capturing firms' R&D expenditures and innovation efforts. Second, using the 1999 agreement as a natural experiment allowed for a more causal interpretation of the results, which is always a plus in research. The researchers also did their due diligence by conducting robustness tests and exploring alternative explanations for their findings.
But, of course, no research is perfect. The paper has its limitations, such as relying on patent data to measure innovation, which might not capture all aspects of innovation. And, the text analysis approach to identify process innovations could potentially misclassify certain innovations. Another limitation is the difficulty in establishing a causal relationship between improved contracting institutions and decreased process innovation. Also, the study focuses on US firms in China, so the findings might not apply to firms from other countries or different contexts.
Now, let's talk about potential applications of this research. Businesses can use these findings to plan their R&D investments, especially when considering offshoring production to countries with cheaper labor. Policymakers can also use these insights to evaluate the consequences of international agreements and regulatory reforms on corporate innovation. Lastly, educators and workforce development programs can benefit from understanding the relationship between offshore labor and innovation strategies.
So, the next time you see a "Made in China" label, remember that there's more to the story than meets the eye. The tale of machines versus cheap Chinese labor is a fascinating and ever-evolving one, showing that globalization and innovation can sometimes be strange bedfellows.
You can find this paper and more on the paper2podcast.com website. Thanks for tuning in!
Supporting Analysis
This research paper discovered that US firms operating in China decreased their process innovations after the 1999 US-China bilateral agreement. Process innovations are the inventions of new methods or processes used in production, aimed at lowering production costs. The study found that the ratio of process innovations to all innovations for US firms with subsidiaries in China decreased by 10%-12% relative to the median ratio after the agreement. The paper suggests that better access to cheap offshore labor, as a result of the agreement, influenced US firms' innovation strategies, leading them to invest less in cost-reducing technologies. Additionally, the study revealed that firms with a larger share of production costs in China and higher foreign ownership stakes in their subsidiaries experienced a more pronounced decrease in process innovations. This finding implies that improvements in contracting institutions, which enabled US firms to source labor cheaply across borders, directly impacted corporate innovation decisions.
The researchers used the 1999 U.S.-China bilateral agreement as a natural experiment to study the impact of improved contracting institutions on U.S. firms' innovation strategies. They focused on U.S. multinational firms operating in China, comparing them to control groups of firms with subsidiaries in other low-wage countries or with operations abroad excluding China. Textual analysis of patent claims from the United States Patent and Trademark Office (USPTO) was used to create a novel measure of process innovation, which refers to inventions of new methods or processes used in production. To identify the effect of the agreement, the researchers first analyzed the performance of U.S. subsidiaries in China, showing that these firms expanded their operations, increased employment, and became more profitable after the agreement. Then, they compared the share of process innovations of treated firms (those with a subsidiary in China before the agreement) to control groups. They also exploited cross-sectional variation in pre-treatment share of wages in Chinese subsidiaries and the extent of foreign ownership to provide further evidence that the change in process innovation is due to the labor channel. The study ruled out alternative explanations, such as Chinese import competition, changes in U.S. firms' patenting practices, and substitution between internally produced and externally sourced innovations.
The most compelling aspects of the research include the use of a novel measure of process innovation based on patent claims, which allowed the researchers to accurately capture the firms' R&D expenditures and innovation efforts aimed at improving production methods. This approach enabled a detailed analysis of the relationship between globalization and corporate innovation. Another strength of the research is the researchers' use of the 1999 U.S.-China bilateral agreement as a natural experiment to identify the effects of improved ability to access cheap and abundant offshore labor on firms' innovation strategies. This approach allowed for a more causal interpretation of the results, strengthening the validity of the findings. The researchers also followed best practices by conducting robustness tests and exploring alternative explanations for their findings. They considered various factors, such as Chinese import competition, changes in U.S. firms' patenting practices, and externally sourced innovations, which helped to rule out potential confounding factors and support the main conclusions of the study. Overall, the research is well-executed, with a strong methodology and thorough analysis, making the findings both compelling and reliable.
Possible limitations of the research include the reliance on patent data to measure innovation, which might not capture all aspects of innovation or accurately represent the true level of process innovation happening in the firms. Additionally, the text analysis approach to identify process innovations in patent claims could potentially misclassify certain innovations or fail to distinguish between different types of process innovations. Another limitation is the difficulty in establishing a causal relationship between the improvement in contracting institutions and the decrease in process innovation. The paper's identification strategy assumes that the assignment of firms into treated and control groups is "as good as random", which might not be entirely accurate. The findings could be influenced by unobservable factors, such as changes in firms' patenting practices, or the substitution between internally produced process innovations and externally sourced innovations. Furthermore, the study focuses on U.S. firms operating in China and might not be generalizable to firms from other countries or operating in different contexts. Finally, the paper does not fully explore the potential long-term consequences of reduced process innovation on overall productivity and competitiveness of the U.S. firms.
The research findings can be applied to better understand the impact of globalization and regulatory changes on innovation strategies of multinational companies. Businesses can use this knowledge when planning their research and development (R&D) investments, especially when considering offshoring production to countries with cheaper labor. Moreover, policymakers can use these insights to evaluate the consequences of international agreements and regulatory reforms on the direction of corporate innovation. This information can help inform decisions on trade policies, labor regulations, and innovation incentives, ensuring that they align with broader economic goals and social welfare. Additionally, the research could also be beneficial for educators and workforce development programs. By understanding the relationship between offshore labor and innovation strategies, they can better prepare students and workers for the evolving landscape of technology and skills demand in the global economy.