have helped China rapidly to improve the high-technology content of its foreign trade. An important caveat is the case of developing East Asia (including China), which has demonstrated a comparative advantage in high-technology products, particularly electrical and electronics products. This seeming inconsistency may be due to the development of an interprocess division of labor in East Asia, whereby the labor-intensive production of high-technology products is conducted in low-wage developing economies. The main promoter of the emergence of this interprocess division of labor has been multinational corporations from developed economies such as Japan and the United States and developing economies such as Korea, Taiwan (China), and others. But, up to now, the technological upgrading of China’s trade and that of some Southeast Asian countries has remained circumscribed to the production and export networks of foreign firms.

China has succeeded in rapidly upgrading the technological content of its foreign trade. The hightechnology content of China’s exports may be explained by the high-technology import content of these products. Half of China’s high-technology imports are used for export processing activities (and not for the domestic market). China’s high-technology trade is heavily concentrated in a limited number of products: three sectors account for 80 percent of China’s high-technology imports (radios and televisions, office machinery, and precision instruments), and the top two export products (radios and televisions, and office machinery) account for 85 percent of high-technology imports. The dependence of China’s hightechnology trade on foreign affiliates is high: almost 80 percent of China’s high-technology exports to and imports from Asia rely on foreign affiliates, and more than half rely wholly on foreign firms (see figures 16 and 17).

**Figure 16 High-Technology Trade in Total Trade Figure 17 China’s Exports by Type of Firm, 2003** **<u>by Category of Firm</u>**

<!-- Start of picture text --> percent 1997 2003 percent<br>25 100<br>90 f oreign firms chinese f irms<br>20 imports export s 80<br>70<br>15 60<br>50<br>10 40<br>30<br>20<br>5<br>10<br>0<br>0<br>Chinese Joint Fully Chinese Joint Fully<br>f irms Ventures f oreign firms Vent ures foreign<br>owned owned<br>f irms firms<br>high-t ech low-tech<br>Sources: Gaulier, Lemoine, and Ünal-Kesenci 2005; China, General Administration of Customs, various.<br><!-- End of picture text --> To the end of the 1990s, China relied heavily on FDI for technological modernization. But FDI has not had all the positive effects anticipated by the Chinese authorities. First, the acquisition of technology through the importation of high-technology products is usually less amenable to the wider dissemination of technology than are other channels such as patents or licenses. Second, the fact that the bulk of China’s high-technology imports is handled by foreign affiliates and, especially, wholly owned foreign firms is likely to have increased the obstacles to the dissemination of high technology. Third, evidence shows that high-technology imports have been used as a substitute for local expenditure on R&D. In sectors which have benefited from large high-technology imports and substantial FDI, the increase in R&D expenditures has been slower than it has in other industries. Surveys of industrial firms in China in the 1990s bear out that high-technology imports had a rather limited effect on domestic innovative capacity.<sup>14</sup> The performance of Chinese firms in terms of productivity and innovation has been determined by their own 17