Technological Upgrading in China and India

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.