Stock Markets, FDI and Challenges of Sustainability
Advances in Chinese Economic Studies series
Edited by Lilai Xu
Chapter 7: The Role of Geographical Proximity in FDI Productivity Spillovers in China
Sizhong Sun, Ligang Song and Peter Drysdale INTRODUCTION The subject of productivity spillovers from foreign direct investment (FDI) to domestic firms has attracted considerable attention since the pioneering work of Caves (1974). It is argued that FDI can positively affect domestic industries and firms’ productivity, namely that there exist positive productivity spillovers to domestically owned industry from FDI through three channels, that is, the backward and forward linkage between FDI-invested firms and domestic firms, labour mobility, and demonstration and competition effects (Blomstrom and Kokko, 1998). However, empirical exercises do not yield consensus support to the existence of positive productivity spillovers. Some researchers find positive productivity spillovers while others find negative or insignificant spillovers (see, for example, Blomstrom and Kokko, 1998; Saggi, 2002; Gorg and Greenaway, 2004; Smeets, 2008 for surveys). However, many of these studies do not consider the impact of domestic firms being geographically close to FDI-invested firms in measuring the productivity spillovers. This omission might contribute to the mixed findings reported in previous studies. It is intuitively straightforward that the closer domestic firms are to foreign firms, the more likely the positive spillovers will occur, as the channels through which the productivity spillovers occur, for example, through the demonstration and competition effects, will be more effective. Only a few researchers have recently empirically investigated the role of geographical proximity in FDI productivity spillovers, for example, Barrios et al. (2006) in the Irish manufacturing sector from 1983 to 1998, Girma and Wakelin (2007) in the UK electronics sector from...
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