Horizontal and vertical spillover effects of foreign direct investment in Chinese manufacturing

DOIhttps://doi.org/10.1108/17544400810854469
Date25 January 2008
Published date25 January 2008
Pages8-20
AuthorChengqi Wang,Zhongxiu Zhao
Subject MatterEconomics
JCEFTS
1,1
8
Journal of Chinese Economic and
Foreign Trade Studies
Vol. 1 No. 1, 2008
pp. 8-20
#Emerald Group Publishing Limited
1754-4408
DOI 10.1108/17544400810854469
Horizontal and vertical spillover
effects of foreign direct
investment in Chinese
manufacturing
Chengqi Wang
Nottingham University Business School, University of Nottingham,
Nottingham, UK, and
Zhongxiu Zhao
School of International Economics and Trade, University of International
Business and Economics, Beijing, People’s Republic of China
Abstract
Purpose – The purpose of this paper is to examine foreign direct investment (FDI) spillovers
accruing to Chinese local industry at both intra- and inter-industry levels and how such effects vary
with the nationality of the investor.
Design/methodology/approach – A panel dataset fo r Chinese industry over the period 2000-2002
is employed for an augmented production function with external factors being defined as the
influences of externalities in production.
Findings – The paper provides evidence of positive spillovers working both within industries and
between industries, and evidence of vertical effects being more important than horizontal effects. The
results also show that Western multinational enterprises (MNEs) generate more vertical spillovers
than their overseas Chinese counterparts. This latter finding confirms that it is necessary to break
down inward FDI by foreign ownership, as this makes a significant improvement over previous
findings.
Research limitations/implications – Owing to data constraints, the design of the empirical
framework does not allow a tightly defined source of potential vertical spillovers, i.e. a distinction of
vertical spillovers through backward or forward linkages.
Practical implications – Given the strong evidence of vertical spillovers, the role of foreign MNEs
in bringing local suppliers up-to-date with best practices should be counted amongst the policy
benefits when judging whether it is appropriate to provide policy incentives to FDI. Policy
effectiveness could be maximized at targeting specific types of foreign investor.
Originality/value – The paper assesses the relative importance of horizontal and vertical spillovers
in a unified framework and the role of nationality of the investor.
Keywords International investments, China, Inward investment, Multinational companies,
Manufacturing industries
Paper type Research paper
1. Introduction
It has long been thought that foreign direct investment (FDI) generates spillovers
which are regarded as the most significant channel for the dissemination of moder n
technology (Liu et al., 2000). Spillovers have attracted much attention not only in the
academic literature on FDI and but also in gover nment policy agencies because of their
relevance for indigenous industrial development. Indeed, attracting inward investment
now gains prominence in the policy agenda of many governments. Yet, there is an
ongoing debate about the existence and extent of such effects. This debate assumes
special importance in view of the emergence of a few developing countries as major
recipients of FDI and the particularly important role of FDI in diffusing modern
technology to these countries.
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