Does quid pro quo benefit state-owned enterprise's innovation in China?

Quid pro quo policies, mainly in foreign partial acquisitions of state-owned enterprises (SOEs) in China, have been controversial due to the corresponding forced technology transfer for market access. Whether and how quid pro quo affects SOE innovation has received limited attention. This study develops a model to analyze how government intervention in SOEs’ social responsibility and the cost advantage of multinational enterprises (MNEs) affect SOE innovation during partial acquisitions. The model shows that increases in SOEs’ social responsibility in industries strongly characterized by public goods and significant technical disparities compared with MNEs and reductions in SOEs’ social responsibility in industries with intense competition decrease SOEs’ relative control. Due to MNEs’ cost advantage, they can often gradually gain control of joint ventures, which weakens SOEs’ innovation resources and independence. The results imply that even if quid pro quo brings technology to SOEs, it is not conducive to SOE innovation; therefore, the government should liberalize quid pro quo.