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Testing for horizontal and vertical foreign investment spillovers in China, 1998–2007

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  • Du, Luosha
  • Harrison, Ann
  • Jefferson, Gary H.

Abstract

As with many developing countries, the Chinese government hopes that knowledge brought by multinationals will spill over to domestic industries and increase their productivity. In this paper, we show that foreign investment originating outside of Hong Kong, Macau, and Taiwan has positive effects on individual firm level productivity, while foreign investment from HKMT firms does not. We also test for both horizontal (within the same industry) and vertical (upstream or downstream) linkages from foreign investment. Using a manufacturing firm-level panel for 1998 through 2007, we find zero or weak positive horizontal externalities. However, our results show that foreign direct investment (FDI) has generated positive productivity spillovers to domestic firms via backward linkages (the contacts between foreign affiliates and their local suppliers in downstream sectors) as well as forward linkages (between foreign suppliers and their local buyers in the upstream sectors).

Suggested Citation

  • Du, Luosha & Harrison, Ann & Jefferson, Gary H., 2012. "Testing for horizontal and vertical foreign investment spillovers in China, 1998–2007," Journal of Asian Economics, Elsevier, vol. 23(3), pages 234-243.
    • Handle: RePEc:eee:asieco:v:23:y:2012:i:3:p:234-243
    DOI: 10.1016/j.asieco.2011.01.001
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    References listed on IDEAS

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    More about this item

    Keywords

    Foreign direct investment; Horizontal spillover effect; Backward and forward linkages; China's manufacturing industries;
    All these keywords.

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • L6 - Industrial Organization - - Industry Studies: Manufacturing
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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