Environmental Standard, Quality Improvement, and Technology Transfer

With technology licensing on quality innovation becoming a general phenomenon in the industry, this study focuses on the impact of quality improvement under different environmental standards. We established a three-country model to analyze the actions taken by the domestic firm located in the home country with high quality technology, the foreign firm located in the foreign country with low quality technology, and the products they export to the third country. The importing country also decides on an environmental standard for reducing environmental pollution. Our major findings are: (1) A less strict environmental standard is preferable for the third country government in the beginning, but the government will become stricter with the increasing substitution of products in the long term. (2) In the aspect of licensing, the higher quality firm tends to provide an option to draw up a royalty licensing contract rather than a fixed-fee licensing contract. (3) The social welfare of the high quality firm is always higher than that of the low quality firm, but it will decrease with the increasing substitution of products. Coming from the increasing substitution of products, the excess profit that is created for the low quality firm is used as a cost for pollution abatement. Therefore, the social welfare of the foreign country does not change when the substitution of product changes. This model fully illustrates the real case of mainland China and enriches the field of technology licensing on quality innovation. JEL Codes: L11, L51, O13.