Evolution of Technology Content in China’s Exports and International Comparison

NiHongfu(倪红福)

Abstract: Under the global value chain, a country extensively employs foreign intermediate inputs in manufacturing its export products, which may not employ entirely local technology. Science-based measurement of technology content in and structure of exports should be conducted using production process data. Using world input-output tables (WIOTs) of 1995-2011, this paper developed a new method for measuring the export technology content of China and other major countries. Our research findings suggest that, since 1995, there has been some technology upgrade of Chinese exports. China’s overall and sector-specific technology contents, and domestic technology contents and indexes all increased and demonstrated a weak convergence towards the average level of developed countries. Judging by the relative rankings of sector-specific technology levels, China is almost locked at the lowest level in the world, and cannot challenge the technological superiority of developed countries like the U.S. and Japan.

Keywords: domestic technology content, global value chain, product technology sophistication, world input-output

JEL Classification Codes: F14

DOI:1 0.19602/j .chinaeconomist.2018.11.0519602/ j .chinaeconomist.2018.09.02

1. Introduction

Since the 1990s, the size and structure of Chinese exports have been transformed. Chinese exports in goods increased from 148.78 billion US dollars in 1995 to 2.209 trillion US dollars in 2013, up 13.8 times. Based on traditional gross value trade data, high-tech goods accounted for a growing share of Chinese exports - a sign of technology upgrade. As a result, China’s technological sophistication of exports exceeded its income level (Rodrik, 2006). One key argument of the “China threat” theory is that China competes with both developing and developed countries in technology. In the report to the U.S.-China Economic and Security Review Commission, Scott (2005) said to the effect that, “We all believed that we only lost labor-intensive jobs like textiles jobs but were able to keep and grow jobs in capital- and tech-intensive sectors. However, data shows that we were deceived by such commonsense: a growing share of Chinese exports are from tech-intensive sectors like automobile and aviation.” China’s export technology and upgrade have always been a topic of great interest and controversy. Scientific and reasonable measurement of technology content is key to answering this question.

Over the past decade or so, deepening specialization under the global value chain and increasingly

scattered and fragmented production processes have given rise to intra-product trade on an unprecedented

1 scale. Products exported by a country (region) may not be entirely manufactured by itself. A country’s overall export technology content is not equal to the actual contribution of technology by the exporting country. In fact, it also contains the technology contributions of foreign intermediate inputs. Based on inter-industry trade theory and the assumption of product homogeneity, the two methods for product (sector) classification and technology sophistication according to factor (technology) intensity may have significant errors and cause an illusion. For instance, both the United States and China may export laptop computers, but China needs to import core components like Intel’s central processing units (CPUs) for manufacturing such computers. Despite its specialization in low-value activities like assembly, China is mistakenly regarded as an exporter of high-tech laptops under traditional gross value trade accounting. Such calculation overestimates its export technology content. In addition, technology sophistication weighted by per capita income also has many deficiencies, such as the assumption of product homogeneity and the distortion by per capita income distribution of various countries. Even if products from different countries are of the same category, their technology levels may differ. Lall et al. (2006) noted that, “Technology sophistication is subject to various non-tech factors rather than specific measurements.” In particular, Lall et al. (2006) also stated that “Measuring export technology content requires production process data rather than product data, but production processes data is difficult to acquire.” In other words, the technology content of a country’s products should be measured based on the tasks of specific production stages, i.e. the production process.

For China, the questions are: Whether did its active participation in the global value chain, the international intra-product division of labor and export-related industrial development help achieve technology improvement and upgrade? What are the features of China’s export technology changes in comparison with other countries? What is China’s current position? Did China evolve from a large exporter into a more competitive one? Is there any transition from “made in China” to “designed in China”? Does the “China threat” theory hold true from a technology perspective? In order to answer these questions, we should take into full consideration the influence of the trade model under the global value chain, and adopt a more scientific method for measuring technology content.

For this reason, this paper developed a new method for measuring technology content based on production processes. This paper has the following innovations: ( 1) For the first time, product technology content is measured from a production process perspective. Overall technology content comprises final production and intermediate inputs on a weighted basis. (2) Product technology content is measured from a world input-output model perspective. This paper uses an international input-output model to measure export technology content, as well as the concept of domestic technology content. In this paper, domestic technology content includes domestic technology content returned from the import of intermediate inputs, which cannot be captured by a single-country input-output model. (3) Technology contents of the same products vary across countries, and such heterogeneity is reflected in this paper. This paper employs labor productivity to substitute the technology contents of the final production process, and obtains technology contents of sectors in various countries. In calculating product technology sophistication, the heterogeneity of the same products from different countries cannot be reflected using weighted per capita income as a substitute for technology content. (4) Under the existing input-output accounting framework, our new method also applies to the statistical accounting of product technology content and structure, and may become a new estimation method that reflects how valueadded from the global value chain creates efficiency.

The rest of this paper is structured as follows: Part 2 Literature Review elaborates deficiencies of traditional methods for measuring technology content. Part 3 introduces a new method for measuring

technology content based on the production process. Part 4 estimates the export technology contents of China and other countries, and examines their changes. Part 5 offers conclusions and further discussions.

2. Literature Review

Traditionally, either of the following two approaches is employed for the analysis of export technology content and structure:

2.1 Product (Sector) Classification Method

Products (sectors) are classified into categories according to factor (technology) intensity. It is generally believed that an economy enjoys higher technology sophistication if there are more capitalor tech-intensive products in its exports. Such a method of classification is extensively employed in studies on trade structure and export competitiveness. As a classic case, Lall (2000) classifies threedigit products of the Standard International Trade Classification (SITC) into resource-intensive, lowtech, medium-tech and high-tech products according to product technology level (generally defined by R&D and patent intensity of parent companies). Products may also be divided into labor-, capital- and tech-intensive products according to the proportion of production factor input. Obviously, measuring the export technology structure by the share of high-tech exports may not reflect a complete picture. In today’s world, a product is often manufactured through processes scattered in various countries. Thus, the homogeneous technology assumption does not hold true. Under the global value chain, core technology may come from a country other than the exporting country. Even though a country’s certain product is classified as high-tech, this country could be specialized in labor-intensive assembly and processing, while design and core components are from another country. Take the Philippines for instance, its semiconductor exports account for a higher share in its total exports compared with that of the U.S.; if measured by the share of high-tech exports, the Philippine exports could be more tech-intensive than those from the U.S. In this manner, the technology level of Philippine exports is overestimated.

2.2 Technological Sophistication and Improvement Method

It is generally believed that product technology sophistication refers to the weighted average of the per capita incomes of all exporting countries of the product, with the weight being such product’s export by the exporting country as a share in the total world export of such product. Rodrik (2006) discovered that China’s export technology varies significantly from that of other countries, and that China’s export technology is equivalent to those of countries whose per capita incomes are three times as high. However, the technology sophistication method leaves out one important factor, i.e. tremendous changes have occurred in the production process under the global value chain system. First, while the same products exported by various countries are of heterogeneous technology contents, technology sophistication is calculated using countries’ per capita GDP on a weighted basis. Therefore, it is unreasonable to conclude that the same products exported by various countries are of the same technological sophistication, and that the technological sophistication of different products is determined by per capita income distribution. Let us assume that two countries export identical products (with the same product quantity and quality), but the two countries employ different proportions of domestic and foreign intermediate inputs in their production process of goods, including export goods. Similarly, countries acquire different value-added in their exports under the global value chain. In this circumstance, even if technology can be accurately measured, the technology sophistication method is not able to reflect real product technology content or contribution for various countries. Take the computer industry for instance, both China and the United States export laptop computers, but the difference is that while the United States takes care of product design and manufactures key components like CPUs, China assembles these imported

components using its low-skill labor. If the technology sophistication method is followed, China’s export technology content may be overestimated.

The traditional product technology sophistication method is inappropriate in some ways. As Lall (2006) points out, technology sophistication is not a method for measuring a specific technology, and is subject to the influence of non-technical factors (political environment, natural resources, infrastructure, geographical layout and distance). These factors must be taken into account in explaining technology sophistication. The new method for measuring technology content based on the production process overcomes most defects of the traditional method, and will better reflect the technology content, structure and dynamic change of Chinese exports from the perspective of the global value chain and international comparison.

3. Method for Technology Content Measurement Based on Production Processes

The product technology content estimation principles mentioned in this paper have many similarities with the principles for trade value-added accounting and implicit pollutants (such as implied carbon emissions) (Daudin, 2012; Johnson and Noguera, 2012; Koopman et al., 2014; Wang et al., 2013; Ni Hongfu et al., 2012; Ni Hongfu et al., 2016). Lall (2006) argues that the technology content of a product should be the aggregate of the technology contents of all its production processes. This argument coincides with the approach to estimate technology content based on tasks of a specific stage (production process). Under the global value chain, the production process is divided into different production tasks or steps. In the input-output table, the input-output relationship of a product reflects its economic and technical characteristics in the final production process, i.e. final processing and assembly of production factors (capital and labor) and intermediate inputs. Therefore, the product technology content should be the sum of the technology contents of the final production process and intermediate inputs. Under the framework of the world input-output table, the total technology content of product k manufactured by country i should be the sum between the technology content of all intermediate inputs and the technology content of the final production process in country i. The technology content of the final production process is denoted by its labor productivity 2, i.e. measured by the ratio between value-added generated from the final production process and employed workforce. The following shows the definitions and calculation methods of the complete technology content, the domestic technology content and its index.

3.1 Complete Technology Content

According to classic input-output model, it is generally assumed that the production function of various sectors in an economy is in Leontief form, i.e.:

(1)

Where, is product output from sector k of country i. is the demand of sector k in country i for intermediate inputs from a sector of a country in order to manufacture its products. is the direct consumption of output from sector l in country j for country i to manufacture one unit of output from sector k. is factor payment (labor and capital factor input). is the share of factor payment (value-