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Fdi And Spillovers In China: Non-Linearity And Absorptive Capacity

Using a fixed effect variance decomposition model, we estimate SUR models to analyze FDI spillovers from contagion and spillovers from competition on local firms in China. While the former type of spillover mainly depends on the degree of foreign presence in the local industry, the latter kind is related to how foreign and local firms interact. The main conclusion is that FDI has been beneficial for the Chinese economy, but that spillovers are not evenly distributed across firms and industries. Spillovers from contagion tend to exhibit an inverse U-shaped pattern with respect to the degree of foreign presence at the industry level, whereas spillovers from competition exhibit a more linear pattern with respect to the level of technological sophistication in foreign firms. Industries with high absorptive capacity and/or high efficiency are the ones best equipped to take advantage of spillovers from foreign-owned firms. Moreover, there are signs of substantial competition between foreign-owned firms: an increase in the foreign capital share in an industry seems to have a stronger effect on incumbent foreign-owned firms than on domestic firms.

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Paper provided by China Economic Research Center, Stockholm School of Economics in its series Working Paper Series with number 2010-12.

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Length: 28 pages
Date of creation: 01 Jan 2010
Date of revision:
Handle: RePEc:hhs:hacerc:2010-012
Contact details of provider: Postal: China Economic Research Center, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
Phone: +46-8-736 90 00
Fax: +46-8-31 81 86
Web page: http://www.hhs.se/en/Research/Institutes/SCERI/

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  1. Horstmann, Ignatius J & Markusen, James R, 1987. "Strategic Investments and the Development of Multinationals," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(1), pages 109-21, February.
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  3. Koizumi, Tetsunori & Kopecky, Kenneth J., 1977. "Economic growth, capital movements and the international transfer of technical knowledge," Journal of International Economics, Elsevier, vol. 7(1), pages 45-65, February.
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  7. Ari Kokko, 1996. "Productivity spillovers from competition between local firms and foreign affiliates," Journal of International Development, John Wiley & Sons, Ltd., vol. 8(4), pages 517-530.
  8. Findlay, Ronald, 1978. "Relative Backwardness, Direct Foreign Investment, and the Transfer of Technology: A Simple Dynamic Model," The Quarterly Journal of Economics, MIT Press, vol. 92(1), pages 1-16, February.
  9. Liu, Zhiqiang, 2008. "Foreign direct investment and technology spillovers: Theory and evidence," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 176-193, February.
  10. Jensen, Richard & Thursby, Marie, 1986. "A strategic approach to the product life cycle," Journal of International Economics, Elsevier, vol. 21(3-4), pages 269-284, November.
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