Part of the answer has to do with “knowledge developments” by foreign car companies working with domestic partners in China. Shengmao caoAssistant Professor of Strategy at Kellogg, defines these disorders as “the know -how of production, sometimes kept a secret from a business, that a partner can observe and assimilate into their own independent businesses”.
Knowledge divisions are not necessarily undervalued. They tend to happen naturally every time companies in the same industry operate in the same place. But they can also be built to happen – especially in developing countries, whose governments often force foreign businesses to join forces with their domestic counterparts for the right to do business there.
This Quid-Pro-Quo Setting-The technology in exchange for access to new markets-usually takes the form of a consortium between a foreign company and a local. For example, Volkswagen vehicles are produced and sold in China by Saic Volkswagen, a consortium owned by the Volkswagen Group manufacturer and the Saic Motor car manufacturer.
CAO and Jie Bai’s associates of Harvard University, Panle Jia Barwick of the University of Wisconsin-Madison and Shanjun Li of Cornell University wanted to find out if the increase in Chinese automatic quality could be explained in part.
“It’s a strategy to climb the ‘quality ladder’ by learning from the top businesses,” Cao explains. ”There are a lot of studies about the effect of the knowledge-spillover of direct investment In general, but there are very few empirical information about this particular requirement of a joint business. It is a long -standing policy in China’s automotive industry. India, Brazil and many countries in Southeast Asia also make a version of it. ”
And the strategy works, according to researchers. Thousands of detailed surveys carried out by JD Power & Associates between 2001 and 2014 and found that consortia developments have contributed to 8.3 % of total quality improvements in Chinese cars during this period.
CAO believes that quantifying these leakage effects can help both sides in a consortium better understand Quid Pro Quos – a sensitive matter amid tensions of commercial tensions. ‘The choice for the foreign company is between profit [while] It may cultivate a future competitor or lose the market completely, “he says.” It is a high -stage decision and a rich question of what is the ideal arrangement. “
Quality
Historically, researchers have measured the effects of leakage of knowledge in terms of “overall productivity of factors”, a reason that compresses all the various economic inputs and exits of a domestic company.
“Of [an] Information measure, but it may be a kind of black box, “says Cao.
In order to build more moving measures on how knowledge developments influenced the quality of Chinese cars, the researchers consulted annual customer surveys conducted by JD Power and partners. They analyze evaluations in 19 different dimensions of performance and quality (such as fuel economy, braking response and internal materials) gathered by nearly 19,000 Chinese car buyers between 2001 and 2014.
By comparing the change in assessments to similar models made by domestic companies against consortiums, the researchers could identify information on knowledge leaks. As Cao explains, “a Chinese company working with a Japanese car company [like FAW did with Toyota] It can be improved in fuel efficiency. And a Chinese company working with a German company [like Brilliance did with BMW] It can be improved in engine performance and safety capabilities. We also consider whether these similarities appear and become stronger over time, as companies work together. ”
The data showed that this really happened. In hundreds of couples, researchers saw the quality of Chinese cars improve in dimensions similar to foreign models produced by a consortium. “In other words, we have seen that cars of brilliance began to look more like BMW cars in terms of their relevant potential,” Cao says.
Researchers estimate that 8.3 % of this quality improvement was due to consortia developments.
Strengthening the case for leaks
However, researchers wanted to exclude other explanations beyond knowledge of knowledge, such as domestic car companies that work either with companies that are already very similar to those or companies targeting the same customers.
But while a domestic Chinese car maker like SAIC can be similar to Volkswagen in 2025, it is extremely unlikely that the overlays existed when the consortium was first formed decades earlier. “Many of these Chinese companies did not have an existing business in the car passenger industry. They used to produce agricultural engines such as tractors and only started making their own cars after the accumulation of some experience in a joint business,” Cao says.
Domestic and common automakers are also targeting very different customers. This is due to the fact that Toyotas and BMW – even when they are made with Chinese partners – are still much more expensive than fully household cars.
What if Chinese automakers saw quality improvements merely with a patent from their foreign partners? The researchers also ruled this: Between 2001 and 2009, more than 10,000 patents were licensed or transferred to the Chinese automaker, but only 27 of them came from a consortium.
In addition, after analyzing the working switches on the LinkedIn profiles of 53,000 Chinese car workers, the researchers saw that the quality of construction in domestic car companies improved when they had workers who had previously worked in a joint venture. For example, when more workers moved from jobs to Saic-Volkswagen to Chinese companies such as FAW and brilliance, there seems to be a greater resemblance to quality. This correlation was particularly strong when employees moved from a consortium to the directly linked domestic company (as from Saic-Volkswagen to SAIC).
Researchers cannot say with certainty that these switchers immediately caused the leaks of knowledge, but they think it is a very promising possible explanation. “It could be a knowledge conductor driven by this flow of workers in one direction,” Cao says.
A recipe for success?
A almost 10 percent hit in quality of construction due to knowledge leak may not sound much. But this is not the only kind of leak that happens in the Chinese automaker, Cao says. Instead, he thinks about it as a kind of “bonus” that the consortia adds to the basic amount of leak throughout the industry that usually results from foreign investment.
“Get a hypothetical scenario where BMW makes its own cars in China without a joint business – Spillover will still happen in other ways, just [BMW] Be there, “Cao says.” What this project shows is that there is an additional benefit of this direct relationship to a consortium. ”
For foreign companies, the upward trend of this Quid Pro Quo is more noisy. “Multinational businesses sometimes blame the policies of a joint venture for mere forced technological transfer,” Cao adds. “It is actually one of the reasons why Trump started the first wave of trade war between the US and China in 2018.”
Consortices are not necessarily an unmistakable way for industries in developing countries to rise to the quality of the staircase. Foreign automakers only enter Chinese consortia, because worldwide demand for cars is so huge that “the cost of abandoning the Chinese market would be too high,” Cao says. In other markets or industries, quid-pro-quo calculus may make no sense. “There are also commercial disagreements that this arrangement can create,” Cao adds.
Still, CAO findings show that under the right conditions, consortia – and the developments of knowledge they encourage – can be a clear victory for host countries. “China’s passenger industry went from almost non -existent 25 years ago to have the highest car sales in the world in 2010,” Cao says. “Looks like a success story.”
