Do spillover benefits grow with rising foreign direct investment? An empirical examination of the case of China

Abstract

Using data for Chinese manufacturing industry for 2001, this paper examines the impacts of foreign presence on the performance of locally-owned Chinese firms. Our key result supports a curvilinear functional form. Foreign penetration rates in excess of just about two third of industrial capital are associated with declining spillover benefits, indicating the dominance of negative spillovers. The curvilinear relationship is found to be particularly strong in labour-intensive industries, contrasting a standard linear relationship in technology-intensive sectors. The finding of the complexity of spillover effects challenges the laissez-faire view that ‘the more inward FDI, the better’ and that inward FDI into all types of domestic industry is equally valuable, in terms of performance benefits. Our findings argue for policy measures to strengthen domestically-owned Chinese industry, to provide effective competition to foreign firms and to absorb the benefits from spillovers more effectively.