This paper studies sources of technological upgrading in China and India. What is
striking about the impressive growth of China and (to a lesser degree) India is that they export
products associated with a high productivity level that is much higher than a country at their
income level. China’s export bundle has changed dramatically, diversifying into technologyintensive
products. China is now the largest exporter of high-technology products in the world.
Exports of India are still significantly less technologically sophisticated, while India has been
more successful in exports of business and information technology (IT) services. It presents
empirical evidence on the important role of FDI inflows and imported capital goods that embody
new technology for TFP growth in a large panel of advanced and developing countries over
1970-2007. Consistent with the cross-country evidence, micro-data and case studies strongly
suggest that FDI and import of capital goods have contributed to rapid technological upgrading
especially in China. Puzzlingly, however, the TFP level in China is much lower than would be
expected from its score on Index of Technological Sophistication of exports, raising a doubt about
whether the shift in export bundle towards high-technology products is associated with a
technological sophistication of domestic contents of export products. An important explanation
appears to be China’s prime role as a final assembler of international production network. The
magnitude of reversal in net export position of China across the two categories, intermediate and
finished goods, is striking, which implies that more and less developed economies are being
affected very differently by China’s rise. With a view to upgrading the capability to absorb
advanced technologies and innovate, China and India have increasingly emphasised human
capital, skill-intensive industries and R&D efforts. Nonetheless, our analysis shows that there is
still an enormous scope for technological catching-up over the next decades.
Technological Upgrading in China and India
What Do We Know?
