How do Chinese industries benefit from FDI spillovers?

Abstract

Recently, Foreign Invested Enterprises (FIEs) in China have increased their investment in not only production activity but also R&D activity. This paper examines the impact of spillovers from such activities on two types of innovations by Chinese domestic firms: Total Factor Productivity (TFP) and invention patent application, using comprehensive industry and province-level data. We evaluate such spillovers according to FIEs' ownership structure, the origin of foreign funds, and the type of their activity: R&D, and production. We find an interesting asymmetry between spillovers to TFP and patent application：while we do not find significant intra-industry spillovers from FIEs, which is in line with previous studies, we find robust inter-industries spillover on TFP. On the other hand, we find substantial intra-industry spillovers promoting invention patent application but no evidence of inter-industries spillovers. Furthermore, whereas spillovers from FIEs to Chinese firms' TFP stem from their production activities, the source of spillovers to invention patent application is mostly through their R&D activity. Our findings indicate a need for multi-dimensional evaluation on the role of FDI in developing countries.Keywords: China, FDI spillovers, R&D, Innovation JEL classifications: O12;O3;F23;O53 This paper is one of the products of DRC-RIETI joint research. We are grateful to Masahisa Fujita, Masayuki Morikawa and participants of the DRC-RIETI joint workshop at RIETI and DRC for their valuable comments. Remaining errors are those of the authors. The opinions expressed in this paper do not reflect those of RIETI or DRC of the State Council,

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