A Political Cycle of Regional FDI Spillovers in an Emerging Market: Evidence from China

Extant literature provides inconclusive findings concerning the effects of foreign direct investment (FDI) presence on domestic productivity, calling for more research into contingency factors of FDI spillover effects. While prior studies in this stream largely focused on the characteristics of FDI sources and absorptive capabilities of domestic firms, this study extends the literature through focusing on contingency factors lying in regional political environment. Specifically, we identify a political cycle in FDI spillovers, that the effect of FDI spillover corresponds with turnover of local political leaders. We argue that as newly appointed political leaders have strong incentive to promote local business development, they tend to devote tremendous efforts to facilitating FDI knowledge spillover and alleviating competitive pressures from FDI. Using data on industrial firms and political leader turnovers in China’s municipal cities, we found that the turnover of local political leaders positively moderates the horizontal FDI spillover effects at regional level. Further, the moderating effect is stronger for native politicians and state-owned enterprises. Our study contributes to the literature of FDI spillover, political business cycle, as well as influences of subnational institutional environment.