FDI and Spillovers in China: Non-Linearity and Absorptive Capacity

Taotao Chen, Ari Kokko, Patrick Gustavsson Tingvall

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    Using a fixed effect variance decomposition model, we estimate SUR models to analyze FDI spillovers from contagion and spillovers from competition on local firms in China. While the former type of spillover mainly depends on the degree of foreign presence in the local industry, the latter kind is related to how foreign and local firms interact. The main conclusion is that FDI has been beneficial for the Chinese economy, but that spillovers are not evenly distributed across firms and industries. Spillovers from contagion tend to exhibit an inverse U-shaped pattern with respect to the degree of foreign presence at the industry level, whereas spillovers from competition are more linear with respect to the level of technological sophistication of foreign firms. Industries with high absorptive capacity and/or high efficiency are the ones best equipped to take advantage of spillovers from foreign-owned firms. Moreover, there are signs of substantial competition between foreign-owned firms.
    Original languageEnglish
    Place of PublicationFrederiksberg
    PublisherCenter for International Business and Emerging Markets, Copenhagen Business School
    Number of pages30
    Publication statusPublished - Mar 2010
    SeriesCIBEM Working Paper Series


    • Spillovers
    • China
    • FDI
    • Fixed effect variance decomposition

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