Machines could not compete with Chinese labor: evidence from US firms’ innovation

Jan Bena and Elena Simintzi

Review of Finance, 2025, vol. 29, issue 6, 1619-1661

Abstract: We study how multinational firms’ access to offshore labor affects their decisions to develop new production technologies. The 1999 US–China bilateral agreement improved contracting institutions in China, reducing uncertainty for US multinationals and enabling cheaper labor sourcing through foreign direct investment. Using data from US parent companies and their Chinese subsidiaries, we show that US firms expanded their Chinese operations and increased subsidiaries’ profitability post-agreement. Our novel measure reveals that US multinationals reduced process innovations after the agreement. These findings highlight the impact of cross-border labor sourcing on domestic technological development, highlighting that production and technological choices of multinationals are jointly determined.

Keywords: process innovation; technological change; labor; China (search for similar items in EconPapers)
JEL-codes: J31 L23 O33 (search for similar items in EconPapers)
Date: 2025
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