FDI Technology Spillovers Within And Across Industries: Evidence From China
| Pages | 29-36 |
| Published date | 21 May 2009 |
| DOI | https://doi.org/10.1108/15587890980001514 |
| Date | 21 May 2009 |
| Author | Xiaowen Tian,Shuanglin Lin |
| Subject Matter | Strategy |
Journal of Asia Business Studies SPRING 2009 29
INTRODUCTION
In recent decades, more and more multinational companies
(MNCs) invested directly in other countries, particularly emerging
markets, and some of the host countries successfully made use of the
foreign direct investment (FDI) to generate rapid economic growth.
The rise of the four Asian small dragons (Hong Kong, Taiwan, Singa-
pore and Korea) in the 1960s-1970s and rapid growth of China and
India in recent years all benefits from the vast inflows of FDI.1 In par-
ticular, China adopts many preferential policies, such as tax holidays,
tax reduction and tax rebate, to attract FDI, and has now become the
largest FDI recipient in developing countries and the fastest-growing
economy in the world. The apparent correlation between FDI in-
flows and economic growth triggered off a fascinating discussion on
how FDI affects the host countries. While there was little dispute on
the positive effect of FDI inflows on the national economy of host
countries as a whole, however, there are profound disagreements
over the impact of FDI on the productivity of domestic firms in the
host countries. A central issue in the debate is whether and how FDI
produces technology spillovers to the domestic firms.
While some believe that FDI generates positive technology spill-
overs to the domestic firms by competition, demonstration and
training of employees, others point to the negative effect of market
stealing and skill stealing of FDI on the domestic firms [Görg and
Strobl, 2001; Aitken and Harrison, 1997, 1999; Girma, Greeaway
and Wakelin, 2001]. In line with the theoretical ambiguity, empiri-
cal research has produced mixed results. Some studies, particularly
the pioneering works by Caves (1974), Globerman (1979), Blom-
strom and Persson (1983), Blomstrom (1986), Blomstrom and Wolff
(1994), and Kokko (1994, 1996), show evidence of positive technol-
ogy spillovers from FDI to domestic firms. Other studies, particularly
the most recent ones by Aitken and Harrison (1999), Djankov and
Hoekman (2000), and Kathuria (2000), find that FDI negatively af-
fects the productivity of domestically owned firms. The same mixed
results are also found in empirical studies on FDI spillovers in China.
Li, Liu and Parker (2001), Liu, Parker, Vaidya and Wei (2001), Buck-
ley, Clegg and Wang (2002) and Liu (2002) find evidence of positive
FDI technology spillovers to Chinese domestic firms, while Hu and
Jefferson (2002) find a negative impact of FDI on productivity of
Chinese domestic firms.
Except for a few exceptions, most of these studies examine only
FDI technology spillovers within industries, i.e., the so-called intra-
industry spillovers, with little attention being paid to possible FDI
technology spillovers across industries. Recently, Kugler (2000;
2006) argues that technology embodied in FDI may pass on to do-
mestic firms outside the industries where FDI is located, and the
so-called inter-industry spillovers could be even stronger than the
intra-industry spillovers.2 Empirical work began to emerge and show
some evidence of FDI technology spillovers across industries (see, for
instance, Sjöholm 1999a, Blalock 2001 and Smarzynska 2004).
Kugler does not, however, pay any attention to possible negative
FDI inter-industry technology spillovers. As a matter of fact, Kugler
(2000, p.1, 41) even goes as far as to claim that only positive “inter-
industry FDI spillovers materialize” and can “explain evidence of
contemporaneous correlation among FDI flows and TFP growth”.
In theory, as will be shown below, FDI could affect the productiv-
ity of domestic firms either positively or negatively both within and
across industries; FDI technology spillovers could well be in favor
FDI Technology Spillovers Within And Across Industries: Evidence
From China
Xiaowen Tian
Bond University
Shuanglin Lin
University of Nebraska at Omaha
absTRaCT
Using panel data of 11324 firms in China from 1996 to 1999, the study finds that FDI tends to generate positive technology
spillovers to domestic firms within the same industry, but adversely affect productivity of domestic firms in other industries. It
is also found that both the positive and the adverse effects are more significant at the local than the national level. Evidence
from China thus suggests that FDI technology spillovers are in favor of domestic firms within the same industry rather than domestic
firms in other industries, and are most likely to affect domestic firms within the same locality. The finding has significant implications
for the study of the interaction between MNEs and local firms in emerging markets.
Keywords: FDI, Technology Spillovers, Intra-Industry, Inter-Industry, China
1 After opening up to FDI, the Chinese economy grew at about 10 percent in the past three decades while the Indian economy began to catch up in the last decade.
2 Inter-industry FDI technology spillovers refer to the technology spillovers generated by FDI to local firms outside the industry where the FDI is located.
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