Is technology acquisition enough to improve China's product quality? Evidence from firm-level panel data

As developing countries open themselves up to trade, many industrial firms in these countries are finding it difficult to compete internationally due to poor product quality and low product variety. Although China has been the largest producer of crude steel since 1996, China's steel firms have produced an overabundance of low-quality steel while domestic purchasers of steel have increasingly demanded higher quality steel products. Many have argued that for Chinese steel firms to improve product quality they must adopt more advanced technologies. Employing firm-level panel data of steel firms in China, we econometrically test the relative importance of two possible sets of factors affecting a firm's ability to utilize technology to improve product quality: technology acquisition factors and technology absorptive capacity factors. We find that technology complements such as in-house R&D and foreign knowledge must be combined with technology for Chinese firms to improve product quality.