Location Determinants, Investor Differences and Economic Impacts
Chapter 9: Spillover Effects of FDI on China’s Domestic Firms’ Productivity
INTRODUCTION In the previous chapter, we revealed that the huge amount of FDI inflows into China has contributed positively to China’s economy in terms of capital formation, employment creation and economic growth. However, we may still want to ask the question: what would be the impact of FDI on China’s domestic firms’ productivity through technology spillovers? The question is significant in a theoretical sense as it is hypothesized that FDI contributes positively to the host country’s productivity growth through its technology spillovers to domestic firms (Dunning, 1993; Caves, 1996). The question is also significant in an empirical sense as evidence from both developed and developing countries varies in supporting the existence of positive externalities generated by FDI (Gorg and Greenaway, 2004). The inconsistency between the theoretical prediction and what has been found and presented in many empirical studies with respect to the impact of FDI on domestic firms’ productivity could be due to many factors, among which three stand out. First, it is not clear through which channels FDI exerts its spillovers. For example, it could occur through increased intra-industry competition, through sharing the common labour pool with domestic firms, or through forward and backward linkages with domestic firms. Second, there are a number of technical problems associated with specific estimation methods, such as endogeneity and selection bias, which may influence the empirical results. Third, it is generally assumed in literature that spillovers from FDI are consistent over time, across industries and regions, and furthermore independent of its industrial and...
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