Export-share requirements and technology diffusion
Doctor of Philosophy
Export-share requirements have emerged as one of the most contentious issues in recent international trade policy debate between industrial and developing countries. This dissertation attempts to shed light on this debate by examining whether export-share requirements facilitate technology diffusion and entry promotion in developing countries. To that end, I utilize two dynamic models of duopoly to capture the effects of the policy imposed at different stage of competition. The first model portrays the case when the host country government imposes an export-share requirement on the foreign multinational after the firm has already installed certain production technology at its subsidiary's plant. The second model describes the case in which the foreign multinational knows about export-share requirement before choosing its production technology. In both models, I find that the effectiveness of an export-share requirement varies with its intensity. Stringent export-share requirement is shown to promote technology diffusion while a rather weak one results in the opposite. On the contrary, for the purpose of entry facilitation, stringent export-share requirement cannot completely eliminate entry deterrence options of the foreign multinational whereas the weak one succeeds in doing so. Thus, export-share requirement is not effective in serving the purposes of facilitating technology diffusion and entry promotion for developing countries hosting foreign direct investment. Another interesting result that emerged from my analysis is that the foreign multinational may benefit from export-share requirement. This is rather counterintuitive since it contradicts the existing finding that the foreign firm is worse off as the policy shifts rent toward the local firm. For a country wishing to speed up the level of technology diffusion and encourage entry of a local firm, my study shows that an export-share requirement is inferior to giving R&D subsidy to a local firm. My result supports Wang and Blomstrom (European Economic Journal 36, 1992, 137--155) policy recommendation which recognizes the importance of measures that aim to increase the absorptive ability of host countries rather than using performance requirements to do the job of encouraging technology transfer.