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


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  • Chengqi Wang
  • Zhongxiu Zhao
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    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 for 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.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Journal of Chinese Economic and Foreign Trade Studies.

    Volume (Year): 1 (2008)
    Issue (Month): 1 (December)
    Pages: 8-20

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    Handle: RePEc:eme:ceftpp:v:1:y:2008:i:1:p:8-20

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    Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK

    Related research

    Keywords: China; International investments; Inward investment; Manufacturing industries; Multinational companies;

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    Cited by:
    1. Wang, Chengqi & Kafouros, Mario I., 2009. "What factors determine innovation performance in emerging economies? Evidence from China," International Business Review, Elsevier, vol. 18(6), pages 606-616, December.
    2. Maryia Akulava & Ganna Vakhitova, 2010. "The Impact of FDI on Firm’s Performance Across Sectors: Evidence from Ukraine," BEROC Working Paper Series 10, Belarusian Economic Research and Outreach Center (BEROC).
    3. Czibik, Ágnes & Makó, Ágnes, 2009. "Kiszolgáltatottság és ösztönző erő a kiskereskedelmi láncok és beszállítóik kapcsolatában. Oksági elemzés beszállítói szemszögből
      [Defencelessness and incentive in the relation
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(4), pages 359-378.
    4. Xu, Xinpeng & Sheng, Yu, 2012. "Productivity Spillovers from Foreign Direct Investment: Firm-Level Evidence from China," World Development, Elsevier, vol. 40(1), pages 62-74.


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