Foreign direct investment industry characteristics and spillovers. A double mechanism model
| DOI | https://doi.org/10.1108/JCEFTS-02-2015-0006 |
| Published date | 02 February 2015 |
| Pages | 49-66 |
| Date | 02 February 2015 |
| Author | Taotao Chen,Ronald W. McQuaid,Maktoba Omar |
| Subject Matter | Economics,International economics |
Foreign direct investment
industry characteristics and
spillovers
A double mechanism model
Taotao Chen
School of Economics & Management, Tsinghua University,
Beijing, PR China
Ronald W. McQuaid
Stirling Management School, University of Stirling, Stirling, UK, and
Maktoba Omar
Edinburgh Napier University Business School, School of Marketing,
Tourism and Languages Craiglockhart Campus,
Edinburgh Napier University, Edinburgh, UK
Abstract
Purpose – The purpose of this paper is to develop a double mechanism model to separate two foreign
direct investment (FDI) intra-industry spillovers mechanisms: spillovers by FDI intensity and by FDI
efciency. This paper seeks to illustrate the potential use of the double mechanism model rather than
provide precise estimates of spillovers. The evidence on the links between technology and the nature,
size and mechanisms of FDI spillovers effects in economically developing countries is mixed.
Design/methodology/approach – A model is developed and tested, in principle. Empirical testing
was conducted in two steps. In the rst step, the authors examined the effect of each inuencing factor
to FDI spillovers separately. To complete this step, the authors divided the whole sample industry into
sub-groups and tested them with the double-mechanism using ordinary least squares regression. This
study applies Chinese National Bureau of Statistics manufacturing industry level data, for the years
2000, 2001 and 2002, including the food industry, beverage industry, textile industry, textiles and
garments, chemicals and chemical products industry, overall manufacturing equipment, special
equipment, computer and other electronic equipment manufacturing industries.
Findings – The analysis suggests signicant differences between types of spillovers: export
orientation of domestic rms mainly inuences FDI spillovers by intensity; the capability gap between
local and foreign rms inuences spillovers by efciency; and the growth of local rms inuences both
types of spillovers. This paper develops existing models of FDI and suggests that disaggregating
spillovers types may provide important theoretical and policy insights.
Originality/value – This study has found, rst, that compared with the classic single mechanism
model, the double mechanism model is more appropriate for testing FDI intra-industry spillovers, as it
is able to separate spillovers by intensity and spillovers by efciency, which are shown as two distinct
mechanisms for FDI spillovers. This allows a deeper analysis into each mechanism and the
identication of relevant inuencing factors.
Keywords FDI, Growth, China, Technology, Export, Intra-industry spillovers
Paper type Research paper
JEL classication – C51, F21, F23, O14
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1754-4408.htm
Foreign direct
investment
industry
49
Journalof Chinese Economic and
ForeignTrade Studies
Vol.8 No. 1, 2015
pp.49-66
©Emerald Group Publishing Limited
1754-4408
DOI 10.1108/JCEFTS-02-2015-0006
1. Introduction
In both Africa and China, an important aspect of sustainable development in a
developing economy is the ability to capture benecial technological and knowledge
spillover effects of foreign direct investment (FDI). The strength and form of these
spillover effects upon a host economy and its rms depends upon a range of factors
including the characteristics of the FDI and local rms and the socio-political and
economic context of the host country, including openness to trade, skills and technology
utilization and changing agglomeration effects (Caves, 1974;Lipsey, 2004;Meyer and
Sinani, 2009;Pan, 2012), including in China (Zhu and Tan, 2000;Yang, 2011;Chen et al.,
2011). However, Hale and Long (2011) argue that the evidence on FDI spillovers in China
is mixed, and that the positive results are often due to endogeneity of FDI or aggregation
bias. Blomström and Kokko (2001) argued that “FDI cannot generate spillovers
automatically in host countries”, and there is a need for greater understanding of the key
factors that have major impacts on the generation of FDI spillovers. This paper
separates two FDI intra-industry spillovers mechanisms, spillovers by intensity and by
efciency, and models their relationships with the export orientation of domestic rms,
the capability gap between local and foreign rms and the growth of local rms.
Using panel data regressions and Organisation for Economic Co-operation and
Development (OECD) data from 1982 to 1997 Choi (2004) found that income level and
growth gaps decrease between source and host countries with increases in bilateral FDI
and also with geographical closeness and a common language, but increased FDI
intensity relative to gross domestic product (GDP) increases domestic income inequality
(Choi, 2006). Arısoy (2012) found a positive impact of FDI on total factor productivity
and growth through capital accumulation and technological spillovers in Turkey, while
Haskel et al. (2002) estimated that a higher share of FDI was signicantly positively
correlated with domestic plant total factor productivity in the same industry in the
UK. However, Kugler (2006) argued that these intra-industry spillover may be small,
but inter-industry spillover (in terms of productivity, scale, skill intensity and capital
intensity) may be large due to technological and business knowledge learning resulting
from vertical integration with the rest of the rm. Girma and Gong (2008) did not nd
benets for local rms of high-technology manufacturing FDI in China, although Zhang
(2001) has argued that there is a strong relationship between FDI and GDP growth, with
it varying by the trade regime, export orientation of the FDI, human capital and
macro-economic stability, and Zhu and Tan (2000) found links between FDI and local
productivity. Similarly Dunning et al. (2001), building on investment and trade
development paths, argued that there is a positive association link between trade and
FDI growth and gross national product per capita.
Hence, the role of different types and characteristics of FDI spillovers may be crucial
in the wider development process. In the past decade, country studies such as those on
Russia, central and eastern European countries and Africa have further enriched the
country case pool in this eld (Yudaeva, 2001;Akbar and Bride, 2004;Dries and
Swinnen, 2004;Bwalya, 2006), although often the empirical results have not shown an
obvious trend of convergence of the results on their impacts.
Three factors that are likely to affect the spillovers to a local economy are tested in
this paper: “the technology gap between domestic and foreign rms”; “export-
orientation of local companies”; and “growth of domestic rms”. The rst two are the
most frequently tested ones, as summarized below, while the “growth of domestic rms”
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