The Effect of the Real Exchange Rate on Technological Progress. An Application to the Textile Industry in China

Technological progress in the textile and clothing sectors is measured for 26 Chinese provinces using panel data by sector and the stochastic frontier method. The impact of the real exchange rate on this technological progress, as well as its transmission channels, are respectively estimated. The technological progress is positive for both sectors, and the real depreciation of the Chinese currency contributes to this improvement. Due to the dominant non state-owned enterprises in the clothing sector, both technological progress and the effect of real depreciation on the increase of technological progress are twice as high as in the textile sector. The principal transmission channel of the impact of the exchange rate on technological progress is through imported equipment, but not through openness.