Incentives to Invest in New Technology: The Effect of Fuel Economy Standards on China’s Automakers

Technology absorption is critical to emerging market growth. To study this process I exploit fuel economy standards, which compel automakers to either acquire fuel efficiency technology or reduce vehicle quality. With novel, unique data on the Chinese auto market between 1999 and 2012, I evaluate the effect of China’s 2009 fuel economy standards on firms’ vehicle characteristic choices. Through differences-in-differences and triple differences designs, I show that Chinese firms responded to the new policy by manufacturing less powerful, cheaper, and lighter vehicles. Foreign firms manufacturing for the Chinese market, conversely, continued on their prior path. For example, domestic firms reduced model torque and price by 12% and 13% of their respective means relative to foreign firms. Private Chinese firms outperformed state-owned firms and were less affected by the standards, but Chinese firms in joint ventures with foreign firms suffered the largest negative effect regardless of ownership. My evidence suggests that fuel economy standards and joint venture mandates both intended to increase technology transfer have instead retarded Chinese firms’ advancement up the automotive manufacturing quality ladder. (Click Here for Latest Version and Appendices) JEL classifications: G3, O2, O3, P2, P3, Q4, Q5, L5, L9 ⇤Harvard University. I wish to thank Anthony Saich, Henry Lee, Wang Qing, Lu Mai, Lilei Xu, Ariel Pakes, and Martin Rotemberg. I am grateful to the China State Council Development Research Center for its support and data access. Funding for this project is from the Belfer Center for Science and International Affairs at the Harvard Kennedy School and from a NSF Graduate Research Fellowship. “We have been trying to exchange market access for technology, but we have barely gotten hold of any key technologies in the past 30 years” Liao Xionghui, Vice President of Lifan, a Chinese automaker (Ying 2012) “New proposed fuel-economy standards for passenger cars...[leave] foreign makers well positioned to inject new technology...That leaves locals such as Great Wall and Geely with the most work to do.” Bhattacharya (Wall Street Journal, 2014)